World shares slump on US growth downgrade

Stocks dropped as investors deployed the emergency chute and slid out of equity markets worldwide following the Federal Reserve's downgrade of the US economic recovery.

"The pace of recovery in output and employment has slowed in recent months," the Federal Open Market Committee said in a statement yesterday. "Measures of underlying inflation have trended lower in recent quarters."

As a result, many economists now think second-quarter GDP grew at perhaps a 1.2 per cent pace, half the rate that the Commerce Department reported little more than a week ago.

Some say the second quarter may look even worse. Barclays Capital economist Peter Newland said his second-quarter GDP figure was now tracking at just a 0.3 per cent annualised rate, down from his previous estimate of 1.6 per cent.

In late trading, the Dow Jones Industrial Average dropped 2.26 per cent, the Standard & Poor's 500 Index declined 2.61 per cent and the Nasdaq Composite Index shed 2.86 per cent.

Among the most active on Wall Street were Alibaba.com, Amazon.com, Alcoa, Boeing and General Electric .

The Chicago Board Options Exchange Volatility Index, or VIX, which is known as Wall Street's 'fear gauge', rose 13 per cent to 25.31 in New York. The index measures the cost of using options as insurance against declines in the Standard & Poor's 500 Index.

"We're in a worldwide soft patch and investors wonder why the Fed didn't do more," James Swanson, chief investment strategist at Boston-based MFS Investment Management, told Bloomberg News.

"People are dumping stocks because they're afraid earnings will decelerate and the economy is losing steam."

The Stoxx Europe 600 Index declined 2 per cent to 254.68.

National benchmark indexes declined in all 18 western European markets. The U.K.'s FTSE 100 dropped 2.44 per cent, France's CAC 40 shed 2.74 per cent and Germany's DAX lost 2.10 per cent.

Among the most active stocks in Europe were Micro Focus International , Nobel Biocare Holding and BHP Billiton.

UBS sank 4.5 per cent. The Swiss bank's UK unit was sued for allegedly copying articles from oil and gas publications and reprinting them in the investment research it distributed to clients.

US Treasuries rose a day after the Fed's bleak assessment of the outlook.

The government sold US$24 billion of the benchmark debt at the lowest yield since January 2009 in the second of three note and bond sales this week totalling US$74 billion.

Two-year note yields touched a record low following the central bank's decision to reinvest maturing agency and mortgage-backed securities in US debt to support the economy.

The yield on the two-year note fell less than 1 basis point, or 0.01 percentage point, to 0.52 per cent at 2.34pm in New York, according to BGCantor Market Data. It earlier hit 0.4892 per cent, the lowest on record, according to Bloomberg.

The current 10-year note yield decreased 6 basis points to 2.70 per cent

The Dollar Index, which measures the greenback against a basket of six major currencies, rose 1.8 per cent to 82.34.

The euro extended losses against the US. dollar, dropping more than 2 per cent, as concern about the global economic outlook spurred safe-haven demand for the greenback. The greenback reached a 15-year high against the yen, sliding 0.19 per cent to 85.24.

The euro was last at US$1.2904, down 2.1 per cent, and dropped 2.4 per cent to 109.89 yen.

The London interbank offered rate, or Libor, for such loans dropped 1.3 basis points, or 0.013 percentage point, to 0.384 per cent, the British Bankers' Association said. That's the biggest decline since September 1, 2009.

The Reuters/Jefferies CRB Index, which tracks 19 raw materials, fell 1.04 per cent to 269.44.

Petrol stocks rose to their highest seasonal surplus in at least a year on August 6, according to the Energy Information Administration. An accumulation in inventories can indicate lower demand.

US crude for September delivery was down US$1.81 at US$78.44 a barrel at 1504 GMT. Front-month ICE Brent crude fell US$1.59 to US$78.01 a barrel.

"There is a time when investors just sell off assets and ask questions later rather than shifting over funds into safe havens,"
Tom Pawlicki, precious metals and energy analyst at MF GLOBAL, told Reuters.

"When the stock market liquidates in a very quick fashion, gold doesn't even benefit even though the safe-haven argument is still valid," he said.

Spot gold was at US$1,195.50 an ounce at 1555 GMT, against US$1,201.85 late in New York on Tuesday. US gold futures for December delivery fell 20 cents to US$1,197.80.