US, European markets recover after China slump
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LONDON - LONDON (AP) — World markets recovered earlier losses Wednesday, as investors weighed the importance of a sharp drop in China's main index, which some took as a sign that stocks are overpriced after this year's powerful rally.
Britain's FTSE 100 closed 0.1 percent higher at 4,689.67, while France's CAC-40 was down just 0.01 percent at 3,450.34.
Germany's DAX fell 0.4 percent to 5,231.98, dragged down by Volkswagen which lost 14 percent, continuing its downward spiral on concerns about its merger with Porsche. All three indexes had been at least 1 percent lower earlier in the day.
In midday trading in New York, the Dow Jones industrials average shed 0.1 percent at 9,205.93 and the Standard & Poor's 500 index slipped 0.1 percent to 988.44.
With a lack of new economic data across most of Europe and the U.S., investors spent most of the day focused on the jitters in Asia, where Shanghai's index fell as much as 5 percent on worries that the Chinese government's easy credit policy to support the economy will not fuel a sustainable recovery.
But a better-than-expected open in Wall Street gave investors in Europe some confidence, allowing indexes to trim some losses.
A jump in oil prices sparked by the U.S. government's report of a huge draw of crude oil from the country's stockpiles also helped to strengthen energy stocks. Oil prices rose $1.35 to $70.54 in European trading after the Energy Information Administration's unexpected news that crude in storage fell by 8.4 million barrels last week. On Tuesday, the contract gained $2.44 to settle at $69.19.
In Asian trading, the Shanghai index plunged 125.30 points, or 4.3 percent, to 2,785.58 after being down as much as 5 percent.
The index has lost nearly 20 percent this month on worries about corporate profits, the strength of China's recovery and possible changes in Beijing's easy credit policy that has helped to fuel the bull run in Chinese stocks this year.
"Global markets are entering a crucial period: with questions being asked of the global recovery's longevity as key sources of stimuli pass their peak, confidence in the outlook may not be so readily found amongst investors as was so clearly the case in the first half," said Neil Mellor, analyst at Bank of New York Mellon in London.
The losses on most markets Wednesday came on the heels of a steep fall in world markets Monday, when investors were dismayed by weakness in American consumer spending. That seemed to many to augur an end to the five-month rally that has boosted some benchmarks over 50 percent.
"We've had a very strong run and people are a little unnerved by what's going on in China, so it seems like a good opportunity to take some money off the table," said Adrian Mowat, chief Asian and emerging market equities strategist at JP Morgan in Hong Kong.
World stock markets have mostly been rising since March on relief that the economic crisis will be shorter than previously feared. But once many indexes reached new highs for 2009, investors started wondering whether stocks are overvalued. Considering trading volumes are limited by the summer holiday season, the uncertainty has caused markets to hover in a range over the past few weeks.
Stuart Bennett, senior foreign-exchange strategist at Calyon in London, said stocks had overreacted to the Chinese market movements in early trading.
"The ups and downs over the past few days and the inconsistent reaction to data and news still leads to the conclusion that the market does not know which way to point," he said.
In Britain, minutes published from the Bank of England's latest policy meeting showed three rate-setters wanted a larger monetary stimulus than announced. Led by governor Mervyn King, the three policymakers wanted to increase the amount of quantitative easing, or increasing the supply of money in the economy, by 75 billion pounds ($120 billion), not just 50 billion pounds. That suggests the central bank may not be done with efforts to spur the economy.
"If the recovery is weaker than the Monetary Policy Committee (MPC) expects, there is a good chance that the MPC will extend the quantitative easing program again in November," said Vicky Redwood, economist at Capital Economics.
In Asia, Japan's benchmark Nikkei 225 stock average lost 0.8 percent to 10,204.00. Hong Kong's Hang Seng shed 1.7 percent to 19,954.23.
South Korea's Kospi fell 0.3 percent, India's Sensex was 1.5 percent lower and Taiwan's index was flat. Australia's benchmark lost 0.2 percent. Indonesia's market, another investor favorite this year, was down 2.7 percent.
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Associated Press writers Carlo Piovano in London and Jeremiah Marquez in Hong Kong and AP researcher Bonnie Cao in Beijing contributed to this report.
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