World Markets Plunge on U.S. Auto Bailout Failure

December 12, 2008 at 9:10 am Leave a comment

World stock markets plunged Friday as the U.S. Senate’s rejection of a $14 billion deal to rescue Detroit’s automakers and further grim economic data stoked concerns that the recession in the world’s largest economy will be longer and deeper than expected.The FTSE 100 of leading British shares was down 169.74 points, or 3.9 percent, at 4,218.95, while Germany’s DAX fell 230.35 points, or 4.8 percent, to 4,536.85. The CAC-40 in France fell 181.02 points, or 5.5 percent, to 3,125.11.

Earlier, Asian markets tumbled, with Japan’s Nikkei 225 stock average down 484.68 points, or 5.6 percent, to 8,235.87. Hong Kong’s Hang Seng index slid 5.5 percent to 14,758.39.

U.S. stock index futures pointed to a big sell-off later on Wall Street. The Dow Jones industrial average was projected to drop 278 points, or 3.2 percent, to 8,292, while the broader Standard & Poor’s 500 index was forecast to fall 33.80 points, or 3.9 percent, to 840.70.

Investors were rattled after the bailout for Detroit’s struggling Big Three automakers failed in the U.S. Senate. The collapse came after bipartisan talks on the auto rescue broke down over Republican demands that the United Auto Workers union agree to steep wage cuts by 2009 to bring their pay into line with U.S. plants of Japanese carmakers.

“Just when the market thought governments and central banks around the world will pull out the stops to support flagging economies, the U.S. Senate surprised by failing to pass the U.S. auto bailout bill,” said Hans Redeker, an analyst at BNP Paribas.

The bankruptcy of any of the big American automakers would deal another blow to the world’s largest economy, which is sliding deeper and deeper into recession.

The Commerce Department said retail sales dropped 1.8 percent in November, the fifth straight monthly drop. The weakness was led by a 2.8 percent fall in auto sales, a decline that had been expected given that automakers already had reported that November was their worst sales month in more than 26 years.

It’s not just stock markets suffering in the wake of the failure of the Senate to pass the auto rescue deal. The dollar slumped overnight too, particularly against the yen.

The dollar fell to a low of 88.16 yen, its lowest level since Aug. 2, 1995 – before it recovered to trade above 90 yen.

That heaps more bad news on major Japanese exporters like Toyota and Sony – already reeling from waning global consumer demand – whose overseas income is eroded by an appreciating yen.

Toyota Motor Co. dived 10.1 percent, Nissan Motor Co. lost 11.5 percent and Sony Corp. fell 6 percent. South Korea’s Hyundai Motor Co. shed 9.3 percent and Kia Motors Corp. was off 9.1 percent.

Mainland China’s stock market fell as investors were discouraged by the lack of any major new initiatives to spur the economy following a top-level economic conference earlier in the week. The benchmark Shanghai Composite Index dropped 3.8 percent to 1,954.21.

Figures this week show that China’s economy is feeling the pinch of the global slowdown. For the first time in seven years, exports fell in November.

Investors also grappled with grim corporate news. Bank of America Corp. announced it expects to cut 30,000 to 35,000 jobs over the next three years.

Markets had rallied after President-elect Barack Obama last weekend proposed a massive stimulus package for the U.S. economy once he takes office in late January, pledging the largest public works program since the creation of the U.S. interstate highway network a half-century ago.

“This has been a typical bear market rally. It’s been based on very high expectations of Obama’s fiscal stimulus plan,” said Arjuna Mahendran, head of Asian investment strategy at HSBC Private Bank in Singapore. “It’s been based on expectations and nothing else.”

Oil prices retreated to below $45 a barrel Friday after rallying back above $47 on expectations of a big output cut from the OPEC oil cartel. Light, sweet crude for January delivery fell $3.37 to $44.61 a barrel in electronic trading on the New York Mercantile Exchange.

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