Fear routs world stocks; French, German indexes fall 7%

Stock markets across Europe and Asia plunged Monday on fears that President Bush's emergency economic stimulus plan won't ward off recession in the USA.

At one point during the day, stock indexes in London, Germany and France faced their biggest drops since the Sept. 11, 2001 terror attacks on the World Trade Center in New York.

Monday's sell-off, which started in Asia and spread to Europe, followed the worst week for U.S. stock markets in five years, as investors registered their forecast for the world's biggest economy.

U.S. financial markets were closed Monday for the Martin Luther King Jr. holiday, but U.S. stock index futures were down sharply, suggesting investors don't have much hope of Wall Street leading a rebound when it returns to business Tuesday.

"I think people were underwhelmed by the (U.S. stimulus) package," said Tim Bond, head of asset allocations globally for Barclays Capital in London.

Bush and Congress have yet to work out details, but the size of the $140 billion plan, although larger than some expected, wasn't enough to convince investors that economic conditions in the USA would not deepen and spread around the globe.

Dominique Strauss-Kahn, the head of the International Monetary Fund, called the global economic situation "serious" on Monday, adding "all the countries in the world are suffering from a slowdown in growth in the Unites States."

Bond said Monday's drop in stock prices represented an accumulation of bad economic news that began in June with the subprime mortgage lending crisis. That has led to tighter credit globally and billions in losses at major banks.

The latest write-downs and losses announced in the past two weeks may have pushed investors over the edge, Bond said.

"What investors have been doing is hoping against hope," he said. "And if you were hoping against hope we could get through this, this was the last straw."

Jan Randolph, who heads sovereign risk for the analyst firm Global Insight in London, agreed.

"It's just a realization that the economic outlook is getting darker," Randolph said. "It is going to be a lot more gloomy than realized."

He said Global Insight has increased its assessment of the likelihood that the U.S. economy will slide into recession to a 50% chance.

The U.K. benchmark FTSE-100 dropped 5.5% Monday to 5578.20; France's CAC-40 Index plunged 6.8% to 4744.15, while Germany's blue-chip DAX 30 slumped 7.2% to 6790.19.

The losses on the blue-chip stock indexes of Germany, Britain and France alone amounted to more than $350 billion, or roughly the size of the combined economies of New Zealand, Hungary and Singapore.

The Toronto Stock Exchange's main index fell for a fifth straight session on Monday, diving more than 4% in its biggest intraday drop in seven years, amid concern about the health of the U.S. economy.

The S&P/TSX composite index was down 520.10 points, or 4.1%, at 12,217.02 in afternoon trading, after earlier falling as much as 617 points.

It was the biggest intraday decline since Feb. 16, 2001. Since last Tuesday, the index has lost more than 1,400 points, erasing all of 2007's gains. On Monday, the index revisited territory last seen in November 2006.

Stock markets have been in full retreat this year over the economic fears. Many indexes are more than 20% below their recent cycle peaks, a traditional sign that what is going on is not just a correction but the start of a bear market.

The broad U.S. Standard & Poor's 500 index had its biggest weekly fall since July 2002 last week and is down 15.3% from its peak close on Oct. 9.

The Dow Jones industrial average is off 8.8% for the year. The S&P 500 index is down just under 10%, and the Nasdaq composite has fallen 11.8% in 2008.

If U.S. stocks open on Tuesday at the levels futures are indicating, it would push the market dangerously close to bear market territory — or a 20% drop from their peak in October. That would mark the end of the bull market that began in early October 2002.

"We're going for some tough slugging here," said Paul Nolte, director of investments at Hinsdale Associates in Hinsdale, Ill.

Dow Jones industrial average futures dropped 546 points or 4.5%. Should the Dow close lower on Tuesday by the amount the futures suggest, it would rank as the fourth-largest point loss ever for the index.

S&P 500 futures were down 62.5 points, or a 4.7% drop, far below fair value, a mathematical formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Nasdaq 100 futures slid 77.5 points, or 4.2%.

One major stock index, the Russell 2000 index of small-cap stocks, fell into bear market territory last week.

Since the start of the year, Japan's Nikkei index has declined 13%, while Hong Kong's blue-chip index is down more than 14%. Even China's Shanghai index — which nearly doubled last year — has fallen 6.6% since the beginning of the year and nearly 20% from its all-time closing high on Oct. 16.

"We've taken our lead from the Asian markets who have not been impressed by the U.S. There's debate if there's going to be a recession in the U.S. I don't think there's much chance of that though," said Richard Hunter an analyst at Hargreaves Lansdown Stockbrokers in London.

Concerns about the outlook for the U.S. economy, a major export market for Asian companies, has sent the region's markets sliding in 2008. Just last Wednesday, Hong Kong's blue-chip Hang Seng index sank 5.4%.

"It's another horrible day," said Francis Lun, a general manager at Fulbright Securities in Hong Kong. "Today it's because of disappointment that the U.S. stimulus (package) is too little, too late and investors feel it won't help the economy recover."

Japan's benchmark Nikkei 225 index slid 3.9% Monday to 13,325.94 points, its lowest close in more than 2 years. China's Shanghai Composite index plunged 5.1%.

India's benchmark stock index tumbled 7.4%, while Hong Kong's Hang Seng index plummeted 5.5%, its biggest percentage drop since the Sept. 11, 2001, terror attacks.

"People are certainly nervous about a potential recession in the U.S. spilling over to the rest of the world," said David Cohen, Director of Asian Economic Forecasting at Action Economics in Singapore.

"Maybe there's still some wariness about politicians are able to come up with a compromise and act sufficiently quickly" on a stimulus package, Cohen said. "I think the impact would be marginal anyway."

Investors took cues from the negative reaction to the president's plan on Wall Street on Friday, when the Dow Jones industrial average slid 0.5% to 12,099.30, bringing its loss for the year so far to nearly 9%.

Traders also have shrugged off assurances from Federal Reserve Chairman Ben Bernanke that the U.S. central bank is ready to act aggressively — which means a likely big interest rate cut later this month — to help the sagging economy.

Some analysts predict that Asia won't suffer dramatically from a possible U.S. recession because increased trade and investment within Asia has made the region less reliant on the United States than in the past. Excluding Japan, 43% of Asia's exports go to other nations in the region, Lehman Bros. calculates, up from 37% in 1995.

But on Monday, uncertainty and pessimism reigned.

In Tokyo trading, exporters got hit hard, partly because of the yen's recent strength against the dollar. Toyota Motor tm lost 3.3% and Honda Motor hmc sank 3.4%.

In Hong Kong, Bank of China bachf dropped 6.4% and China Construction Bank cichf slid 7.8%.

India's benchmark Sensex index fell 1,353 points, or 7.4% — its second-biggest percentage drop ever — to 17,605.35. At one point, it was down nearly 11%.

The decline hit companies across the board, with power utility Reliance Energy relff falling 16.4%. Major software company Tata Consultancy Services slid 7.6%.

"A gloomy U.S. climate has affected the global markets. Even if those markets recover, it will take sometime for the recovery to reach India because today's fall has been so drastic," said Jayant Pai, of the Mumbai investment company IL&FS.

Pai and others suggested that the declines could lead to a buying opportunity.

"The sell-off today takes us close to the bottom," she said.

But leading investment bank Morgan Stanley said Monday that was not the case now, at least as far as Europe was concerned.

"We are not compelled to buy yet despite bearish sentiment," its European equity strategy team said in a note. "We continue to prefer cash over equities."

Recent polls show institutional investors with large cash holdings, a sign of deep concern about the future direction of assets.