Global markets tumble; Japan calls for more U.S. action

http://news.yahoo.com/s/nm/20081016/ts_nm/us_financial5_19

By Tony Munroe
Thu Oct 16, 2:44 AM ET

HONG KONG (Reuters) - Japan said Washington may need to pump more cash into its banks to restore investors' confidence as fears of looming recession sent share markets into a tailspin after U.S. Fed Chairman Ben Bernanke warned of tough times ahead.

Shrugging-off recent optimism about massive government efforts to prop up the global financial system, investors fled from stocks, commodities and other risky assets to the relative safety of cash. Stocks in Tokyo dropped 11 percent.

The biggest monthly decline in U.S. retail sales in more than three years added to the gloom, with the price of oil falling to a 13-month low below $73 on fears of a collapse in demand.

Signs of looming recession were all around.

In Japan, a Reuters poll showed manufacturing business sentiment hit a 6-year low this month, in yet another signal the world's second-biggest economy was headed for a downturn.



In Brussels, European Union leaders will call for a EU-wide crisis response center and urged global partners to reform the financial system at a summit this year, according to a draft statement.

"This is the end of the beginning. We are going from a situation in which the banks were the main actors in the crisis to a situation where the real economies will be next," Marino Valensise, chief investment officer of Baring Asset Management, said in Hong Kong.

Shares in global miners Rio Tinto and BHP Billiton lost 16 and 13 percent, respectively, after base metal prices fell overnight and Rio warned of slowing Chinese demand for commodities because of the financial crisis.

Third-quarter earnings reports that began trickling in reflected the damage.

Swiss bank UBS, the European lender hardest hit by the subprime mortgage meltdown, eked out a small profit and became the latest bank to raise capital with a 6 billion franc ($5.3 billion) injection from the government.

Among U.S. banks least hurt by the crisis so far, JPMorgan Chase said its profit plunged 84 percent, while Wells Fargo & Co posted a 25 percent drop in earnings.

SIGNIFICANT THREAT

Asian stocks outside of Japan dropped nearly 8 percent after Wall Street suffered its worst one-day percentage declines since the stock market crash of 1987. The Dow Jones industrial average ended down 7.87 percent, and the S&P 500 index lost 9 percent.

Europe's big stock markets were forecast by bookmakers to open lower by between 4.4 percent and 5.9 percent.

Japanese Prime Minister Taro Aso said on Thursday the selloff showed that investors believe the U.S. bank bailout plan may not be enough. A day earlier he said that a meeting of global financial leaders to address the crisis would be pointless without a fresh commitment to inject funds into banks.

"The markets are selling off stocks because investors still think the steps by U.S. authorities are not sufficient," he said.

Bernanke warned that credit market turmoil posed a "significant threat" to an already weak economy.

"By restricting flows of credit to households, businesses, and state and local governments, the turmoil in financial markets and the funding pressures on financial firms pose a significant threat to economic growth," Bernanke said.

Suggesting Federal Reserve's openness to further interest-rate cuts, Bernanke said concerns about inflation were diminishing. He said it would take time to restore normal flows of credit.

The Securities and Exchange Commission, which has clamped down on short-selling in response to violent swings in the market, late on Wednesday said big investors will be required to disclose their short positions under a new interim rule.

France, Germany and Britain called for leaders of the Group of Eight major industrialized countries to gather next month with the heads of emerging economies to consider a radical overhaul of the world's 60-year-old financial architecture.

The White House said G8 leaders were expected to meet this year on the worst financial crisis since the 1930s Great Depression.

Governments around the world have pledged $3.2 trillion in emergency measures -- roughly an equivalent to the economic output of Germany or China -- including taking stakes in banks to help them stabilize, rallying world markets on Monday and Tuesday.

But optimism quickly gave way to fears that government intervention would not save major economies from recession.

"Last week people were panicking over the financial system, nobody really knew what would happen. But now it's the real economy," said Takashi Ushio, head of investment strategy at Marusan Securities in Tokyo.

GLOOMY OUTLOOK FROM FED

Fed Vice Chairman Donald Kohn said latest readings on the U.S. economy have become more downbeat and the impact of a recent emergency interest rate cut had been "overwhelmed" by escalating mistrust among financial institutions unwilling to lend to one another.

The U.S. housing market has yet to hit bottom, and inventories of unsold homes are likely to remain high, Kohn said. It was probable the economy would remain "subpar" well into next year, gradually improving in late 2009 and 2010, he said.

As stocks around the world plunged, the dollar and safe haven assets such as gold and short term U.S. treasuries rose.

The U.S. government said retail sales fell 1.2 percent in September, the biggest monthly decline in three years, and wholesale prices slipped 0.4 percent.

(Reporting by Reuters bureaus around the world; Editing by Tomasz Janowski)