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Markets Remain Vulnerable Ahead Of Fed Meeting

Filed by KOSU News in Business.
August 9, 2011

Wall Street appeared ready to give investors another roller-coaster ride Tuesday, as the Dow swung wildly in early trading a day after U.S. markets experienced their biggest sell-off in three years.

In the first two minutes of trading, the Dow Jones industrial average shot up more than 100 points, lost it all quickly, then moved up again by more than 200 points. Monday, the blue-chip index plummeted a dizzying 634 points – the worst single day since the 2008 collapse of Lehman Brothers.

Meanwhile, Asian markets Tuesday recouped some of their losses from the previous day in early trading, but then took another nose dive;. Hong Kong’s Heng Seng index tumbled 5.7 percent and Japan’s Nikkei lost 1.7 percent. Europe fared better, with the FTSE 100 index of leading British shares up 0.2 percent while France’s CAC-40 rose 0.7 percent. Germany’s DAX shed 1.4 percent.

Investors have been spooked by fears over the consequences of the U.S. credit downgrade, Europe’s debt crisis and mounting expectations of a global recession.

Many on Wall Street were watching the Federal Reserve, which meets Tuesday. One option for the Fed is to announce that it is considering another monetary stimulus, which would be its third in the last three years.

“They won’t do anything big, but they will use a lot of language in their statement to show that they’re concerned about the situation, that they understand the worries, that they’re ready to act,” said Joseph Gagnon, a senior fellow at the Peterson institute for International Economics.

Gagnon said the Federal Reserve could clarify how long it plans to keep interest rates at zero and possibly buy longer-term assets.

“These are small measures, but they show some responsiveness and [the Fed] could also promise to do more should things really turn bad,” he said.

Nigel Gault, chief U.S. economist at IHS Global Insight, said the Fed doesn’t have many tools at its disposal.

“It would be very easy to be disappointed,” Gault said, pointing to Federal Reserve’s past efforts to redirect the economy.

“It’s really not within the Fed’s powers, unfortunately, to make a huge difference to the growth outlook.”

Worries about the U.S. economic recovery have been building since the government said that economic growth was far weaker in the first half of 2011 than economists expected. Intensifying concerns were reports showing that the manufacturing and services industries barely grew in July, although job growth was better than economists expected last month.

Investors are also worried that Italy and Spain could become the next European countries to have trouble repaying their debts. Greece, Ireland and Portugal have already received bailout loans because of Europe’s 21-month-old debt crisis.

The fears have pushed investors to shun Spanish and Italian bonds, which have led to higher yields and in even higher borrowing costs for the two countries. The European Central Bank stepped in Monday and bought billions of euros worth of their bonds.

In the oil markets, worries over the state of the global economy continued to weigh on prices. The main benchmark rate was down $3 at $78.31 a barrel. Earlier it had fallen to $75.71, its lowest since September 2010.

Stock markets in the traditionally oil-dependent Middle East also fell Tuesday, including the benchmark index in OPEC powerhouse Saudi Arabia, the region’s largest economy. It dropped 3.6 percent by midday.

The Associated Press contributed to this report. [Copyright 2011 National Public Radio]

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