Grim outlook drives down shares

A grim economic outlook from the US Federal Reserve and signs of slowing growth in China and Germany drove world stocks down more than 4 per cent today, prodding investors into the safe-haven US dollar and government bonds.

The US dollar climbed to a seven-month high against a basket of major currencies as investors dumped riskier trades in favour of the world's most liquid currency.

The sharp rally in the dollar pushed down US crude oil prices by more than 5 per cent, while gold fell nearly $50 an ounce in a broad retreat in the commodities sector.

US stocks were sharply lower in early trading and European shares fell more than 4 percent to a two-year low, dragging an index of global equities to a one-year trough.

The Dow Jones industrial average was down 348.59 points, or 3.13 per cent, at 10,776.25. The Standard & Poor's 500 Index dropped 35.55 points, or 3.05 per cent, at 1,131.21. The Nasdaq Composite Index slid 75.81 points, or 2.99 per cent, at 2,462.38.

World stocks as measured by the MSCI index were down 4.4 per cent. The more volatile emerging markets stock index slid 6.2 per cent.

In Europe, the FTSEurofirst 300 fell 4.4 per cent. Britain's FTSE 100 lost 4.8 per cent, and Japan's Nikkei closed down 2.1 per cent.

The Federal Reserve warned yesterday of significant risks to the already weak US economy as it launched a plan, dubbed Operation Twist, to lower long-term borrowing costs and bolster the battered housing market.

"It seems the market doesn't believe Operation Twist is enough to kick-start the spluttering economy," said Ben Potter, market strategist at IG Markets. "A very downbeat outlook ... seems to have unsettled markets even further."

Adding to the gloom about the global economy, China's manufacturing sector contracted for a third consecutive month in September, while business activity in Germany grew at its weakest pace in more than two years in September and new orders fell for a third month.

Benchmark 10-year notes rose a point, their yields falling to 1.76 per cent from 1.87 per cent late yesterday.

The dollar climbed to a seven-month high against major currencies. It was last up 1.6 per cent at 78.556.

"The dollar's strength and the risk aversion that we have seen in recent weeks have picked up steam," said Tohru Sasaki, head of Japan rates and FX research at JPMorgan Chase.

The euro fell to an eight-month low of $1.3384, its lowest since January, and was last down 0.9 per cent at $1.3443.

Spot gold last traded down at about $1,734.

US crude futures were down $4.07 at $81.80 a barrel, while Brent futures were $3.64 lower at $106.74 a barrel.

Reuters