World markets down as Euro talks disappoint

Disappointment about the outcome of a meeting between German Chancellor Angela Merkel and French President Nicolas Sarkozy ruled investor sentiment on both sides of the Atlantic overnight.

Merkel and Sarkozy on Tuesday detailed plans for closer euro zone integration including a financial transaction tax, but that did not include boosting the size of the euro zone's rescue fund or beginning sales of euro bonds. Investors judged the plans as inadequate to stem the sovereign debt crisis.

"The market was holding out hope that we would be closer to a euro bond, but it sounds like they're trying to do everything but, as it won't be politically acceptable to Germany," Phil Flynn, senior market analyst with PFG Best in Chicago, told Reuters."What we're moving toward is more uncertainty."

In late trading, the Dow Jones industrial average dropped 0.88 per cent, the Standard & Poor's 500 Index shed 1.17 per cent while the Nasdaq Composite Index fell 1.51 per cent. Europe's Stoxx 600 Index closed with a 0.1 per cent decline.

The euro fell 0.3 per cent to US$1.4396 at 1.33pm in New York. It also slid against the yen, shedding 0.5 per cent to 110.43 yen.

The latest economic data from Europe also were bleak. Germany's gross domestic product barely expanded in the second quarter, rising 0.1 per cent from the first quarter. And the European Union didn't fare much better, with GDP in the euro area increasing 0.2 per cent from the first quarter, when it rose 0.8 per cent.

That's the euro area's worst performance since the euro region emerged from a recession in late 2009 and short of economists' estimates for a 0.3 per cent expansion, according to Bloomberg News.

"Europe will continue to be an overhang until they come up with realistic policies," Peter Jankovskis, who helps manage about US$2.6 billion at Oakbrook Investments in Lisle, Illinois, told Bloomberg News. "We've already got disappointing economic numbers out of Europe earlier today. Then, you have a program which is not really doing anything to address that."

Today's indications that the economic outlook remains weak hurt oil. Crude rude oil for September delivery fell US$1.23 to settle at US$86.65 a barrel on the New York Mercantile Exchange.

Instead, investors sought refuge in gold. Gold futures for December delivery climbed 1.5 per cent to close at US$1,785 an ounce at 1.45pm on the Comex in New York. That's the highest settlement ever, according to Bloomberg.

On a bright note, investors welcomed the fact that Fitch Ratings affirmed its AAA credit rating on the US, as well as data that showed industrial production in the world's largest economy advanced in July.