Global recovery fears hit stocks

[May 12, 2011]  LONDON (AP) -- Stocks took a pounding Thursday as investors worried about the state of the global economy and whether Greece's debt crisis will hurt the rest of Europe's financial sector.

Fears over the state of the world economic recovery have picked up despite last week's upbeat U.S. jobs data. That's most evident in the performance of commodity prices this week, which continue to soften on expectations demand will weaken.

Investor nerves were further frayed by data suggesting China's economy has slowed down and that other fast-growing economies, such as Brazil and India, will be raising interest rates further in coming months to keep a lid on rising inflation.

All this comes a day after the Energy Information Administration shocked investors with the news that U.S. gasoline demand dropped 2.4 percent last week, the largest drop in seven consecutive weeks of declines, and that oil supplies grew by 3.8 million barrels, more than twice as much as what analysts expected.

The EIA figures indicate demand for energy in the U.S. may not be as high as thought and that the recovery in the world's largest economy may be faltering.

A raft of U.S. economic data later could prove key to the way the markets close out the week. Highlights include monthly retail sales figures as well as the weekly jobless claims numbers.

"A reasonable outcome in this number will help soothe risk appetite but jittery conditions are unlikely to go without a fight," said Jane Foley, an analyst at Rabobank International.

In Europe, the FTSE 100 index of leading British shares was down 1.5 percent at 3,996 while Germany's DAX fell 1.8 percent to 7,363. The CAC-40 in France was 1.5 percent lower at 3,996.

Wall Street was poised for another retreat following Wednesday's poor performance -- Dow futures were down 0.6 percent at 12,528 while the broader Standard & Poor's 500 futures fell an equivalent rate to 1,331.

The EIA data were having an impact in the oil markets, too. Benchmark crude for June delivery was down a further $1.25 to $96.96 a barrel in electronic trading on the New York Mercantile Exchange. The contract dropped $5.67 on Wednesday.

While jitters over the state of the global recovery are hurting stocks, Europe's debt crisis -- in particular whether Greece will have to restructure its mountain of debt -- is one of the key themes in the currency markets.

The euro has been badly hit by the resurfacing of Greece's debt woes. It was down a further 0.5 percent Thursday to $1.4133. Just a week ago it was trading near 18-month highs above $1.49.

Earlier in Asia, Japan's Nikkei 225 index sank 1.5 percent to close at 9,716.65. South Korea's Kospi slid 2 percent to 2,122.65, and Hong Kong's Hang Seng lost 0.9 percent to 23,073.76. Australia's S&P/ASX 200 was off 1.8 percent at 4,696.10.

Mainland Chinese shares extended losses as investors fretted over the economic outlook, after industry figures showed auto sales declined for the first time in more than two years in April. The benchmark Shanghai Composite Index lost 1.4 percent to 2,844.08, and the Shenzhen Composite Index of China's smaller, second exchange fell 1.4 percent to 1,194.88.

Lee Hardman, an analyst at The Bank of Tokyo-Mitsubishi UFJ, said that some of the reasoning behind the recent weakness across markets is related to investors adjusting their positions ahead of the expected end to the U.S. Federal Reserve's policy of pumping money into the U.S. financial system. The current $600 billion -- commonly referred to as QE2 -- is widely-expected to end this summer.

One effect of the monetary injection was to have more money swirling around the financial system, which many investors used buying up riskier assets, such as stocks and commodities.

"We believe that the recent reversals being experienced in financial markets may also reflect an ongoing adjustment to the end of QE2 from the Fed which is coming more closely into view with it scheduled to end in early July," Hardman said.

[Associated Press; By PAN PYLAS]

Pamela Sampson in Bangkok contributed to this report.

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