World stocks tumbled while the dollar plumbed record lows on Monday as fresh concerns about the health of the banking sector and a U.S. recession drove investors to safe-haven gold and government bonds.
Emerging markets took a beating as investors dumped risky assets, while the cost of corporate bond insurance rose after last week’s weak U.S. confidence data and a regional business survey intensified worries about the world’s biggest economy.
HSBC announced bigger-than-expected bad debts of $17.2 billion due to problems in the U.S. housing market. The global banking sector is expected to suffer a total of $300-400 billion writedowns from the credit crunch, threatening to derail growth in the broader economy.
“There are a lot of unanswered questions about banks’ balance sheets,” said Thierry Lacraz, strategist at Swiss bank Pictet. “Estimates show a lot of shareholder equity is having to be written down, which will make banks shy to lend this year.”
The FTSEurofirst 300 index was down 1.7 percent on the day while MSCI main world equity index fell 1.3 percent to hit a one-week low.
HSBC shares fell more than 1 percent before turning positive, while the broader bank sector index was down 1.8 percent on the day in Europe, dragging down broader indices along with technology and insurer shares.
The dollar fell to all-time lows against a basket of major currencies as recession fears cemented expectations for U.S. interest rate cuts with investors pricing in a more than 70 percent chance of a three-quarter point rate cut in March.
The dollar also hit a three-year low against the low-yielding yen of 102.62 yen, with export-damaging yen strength weighing on Japanese shares.
GROWTH/INFLATION TRADEOFF
Expectations that the Federal Reserve and other central banks would cut interest rates to spur the ailing economies have kept world stocks off January’s 15-month low, although recent data showing rising inflationary pressures might discourage monetary authorities from easing dramatically.
“We are seeing the deepest housing deflation since the Great Depression and a massive unwind of the largest credit binge ever, and fiscal and monetary policies are more limited in their ability to respond than earlier this decade. Not good news for the economy or the equity market,” David Rosenberg, North American economist at Merrill Lynch, said in a note.
Central banks in the euro zone and Britain are expected to leave interest rates on hold this week. The Bank of England is forecast to cut interest rates again in May, while interest rate futures are pricing in an around 70 percent chance of a euro zone rate cut by June, up from 20 percent last week.
The iTraxx Crossover index, the most-widely watched indicator for European credit market sentiment, widened to 600 basis points.
Emerging sovereign spreads hit 291 basis points over U.S. Treasuries, their widest in five weeks. Emerging stocks fell 2.4 percent.
The March Bund future was up 33 ticks.
U.S. light crude was steady at $101.81 a barrel, below last week’s record highs.
Gold — seen as an inflation hedge and safe-haven asset — rose as high as $983.90 an ounce while silver rose to $20 an ounce for the first time since November 1980.
