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World markets stumble on worries over U.S., Europe and China

By Frank Ahrens and Howard Schneider
Washington Post Staff Writer
Wednesday, June 30, 2010; A01

Growing fears of a double-dip recession, driven by signs of a slowdown in China, worry over the strength of the European banking system and a big drop in U.S. consumer confidence, pushed stocks on Tuesday near their lowest levels of the year.

The global sell-off began in Europe and hammered U.S. markets, where the three major indices fell between 2 and 4 percent Tuesday. Major exchanges in Britain, Germany and France closed down between 3 and 4 percent, and early trading in Asia followed suit. After huddling at the White House with his top economic advisers, President Obama acknowledged that the United States faces economic "head winds" from Europe.

The worldwide drop seemed to be a verdict from investors on the results of the recently concluded Group of 20 summit in Toronto. World leaders' pledge to cut government deficits and sustain economic growth will be easier said than done, the markets judged.

Investors appear to have little faith in the fragile U.S. recovery and in the ability of governments overseas to rein in their massive debt and deficit problems. Now add China to the list of global worries. The Asian economic giant, which has enjoyed double-digit growth in recent years, saw its prospects for growth downgraded by a New York research firm Tuesday, further hurting stocks.

"There's concern creeping up around the world that a potential double-dip [recession] is going on here," said Linda Duessel, equity-market strategist at Federated Investors in Pittsburgh. She said market worries about China are exacerbating those about Europe.

Europe endured the same financial crisis as the United States in 2007 and 2008, but it has not benefited from a similar, albeit wobbly, recovery. Debt crises in Greece, Spain, Portugal and elsewhere have overwhelmed stimulus attempts by governments to jump-start the continent's recovery, and now U.S. investors worry that problems in Europe and around the globe could drag the U.S. economy back into recession.

U.S. stocks were battered Tuesday, as the Dow Jones industrial average shed nearly 270 points and crashed down not only through the 10,000 level but the 9900 level, as well, losing 2.6 percent on the day to close at 9870.30. All 30 Dow stocks finished in the red. The broader Standard & Poor's 500-stock index closed down 3.1 percent, and the tech-heavy Nasdaq composite index fell 3.8 percent. A lonely bright spot among tech stocks Tuesday was Tesla Motors, the electric-car company that launched its initial public offering this week.

Particularly hard hit on Tuesday were stocks in the heavy-manufacturing sector, such as Boeing, Caterpillar and aluminum giant Alcoa. That means investors are taking a dim view of global growth that relies on big-ticket investments. Also Tuesday, troubled megabank Citigroup became the second stock to trigger the Securities and Exchange Commission's two-week-old "circuit-breaker," a five-minute trading pause, after a 17 percent drop for the company's stock. The erroneous trade was later canceled.

The stock market saw right through good housing news released Tuesday, as data showed that April home prices rose for the first time in seven months. The increase, however, came almost solely from government tax credits that spurred sales before expiring.

Surprising Wall Street on Tuesday was a June consumer-confidence figure that fell off the table. According to the Conference Board, an economic research firm, the index tracking U.S. consumer sentiment dropped to 52.9 points in June from 62.7 in May. Economic forecasters expected the number to remain largely unchanged from May, which means that they have been overestimating Americans' comfort with spending. If global worries pushed down U.S. stocks at opening on Tuesday, then the consumer-confidence shocker kept the boot on the neck all day.

Now investors and traders look toward Friday's jobs report for June, which could bring more bad news. Forecasters expect the June unemployment rate to stay unchanged at 9.7 percent. Even if the report shows that new jobs were added to the economy last month, traders and investors will scrutinize it to see where they came from. (Nearly all of the 431,000 new jobs created in May came from census workers, and they will go away when the decennial count concludes this fall.)

"Another disappointing jobs number Friday would be a big disappointment for the market," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

Tuesday's Wall Street sell-off follows a confluence of news that reinforced doubts about global growth, particularly in Europe.

Banks on the continent are scheduled to release stress tests in coming weeks to resolve doubts about their health, and there is concern that a poor result could further undercut growth in European countries that already trail the rest of the world. The European Central Bank this week also ends one of its main emergency lending programs, adding a new strain to the system.

In a Monday speech in Switzerland, the head of a key world financial organization cautioned that some banks are still perilously weak, and warned against governments leaving support programs in place for too long or protecting weak institutions.

"The essential task of reducing leverage and repairing balance sheets is simply not finished," said Jaime Caruana, general manager of the Bank for International Settlements, an organization of major world central banks, including the U.S. Federal Reserve. "Most government support measures for the financial industry were intended to last only long enough for banks and other financial firms to adjust -- to absorb the losses from toxic assets, to raise new equity capital, to develop more stable sources of funding. . . . Authorities should be proactive in getting banks to make more progress."

The process is considered to have lagged particularly in Europe, and financial stocks were among the continent's biggest losers in the day's trading. In some cases, losses exceeded 7 percent.

Staff writer Sonja Ryst contributed to this report.

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