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Markets fall as growth hopes fade Markets fall as debt worries rise
(about 4 hours later)
Global markets have fallen on concerns over the length of the downturn after Federal Reserve minutes showed it lowered its forecast for US growth. Global stock markets have fallen after a warning that the UK's top credit rating is at risk.
The Dow Jones was down 1.5% by early afternoon, while the UK's FTSE 100 fell 2.8%, France's Cac 40 lost 2.6% and Germany's Dax shed 2.7% by their close. UK shares were hit after ratings agency Standard & Poor's (S&P) changed the UK's outlook to negative.
Asian shares had also ended lower with the Nikkei closed 1% down. The move sparked fears that other economies, such as the US, might face a similar fate.
UK shares were also hit after ratings agency Standard & Poor's revised the UK's outlook to negative. The Dow Jones index ended the day down 1.5%, while the UK's FTSE 100 fell 2.8%, France's Cac 40 lost 2.7% and Germany's Dax shed 2.7% by their close.
The agency cited rising public debt as a growing concern, which hit a record £8.46bn in April compared to £1.84bn in the same month last year. A credit rating downgrade would make is more expensive for the UK to borrow on international markets and could jeopardise spending plans.
Standard & Poor's said UK debt could be close to 100% of gross domestic product, and remain at that level in the medium term. Governments worldwide are borrowing more as they try to stimulate their economies.
"There are concerns finally coming through about where the underlying growth is going to come from," said Justin Urquhart Stewart, investment director at Seven Investment Management. "It raises questions about our own situation (in the US) in terms of our deficits and our national debt," said Alan Skrainka, US-based chief market strategist at Edward Jones.
"We need a growing level of demand. There's a certain amount of restocking happening, and unfortunately the market has been taking that as a sign of a recovery, which it is not," he said. Asian shares also ended the day lower with the Nikkei down 1%.
'Downbeat''Downbeat'
Meanwhile there was more pessimism about the US economy.Meanwhile there was more pessimism about the US economy.
Just the thought of a downgrade would provide an excuse to sell dollars Matt Esteve, trader Rating agency warning on UK debt
Claims for unemployment benefits set a record for the 16th straight week, data released earlier showed.
On Wednesday the Fed said it expected the economy would contract between 1.3% and 2% this year.On Wednesday the Fed said it expected the economy would contract between 1.3% and 2% this year.
Earlier in the year, the bank predicted the economy could contract between 0.5% and 1.3%.Earlier in the year, the bank predicted the economy could contract between 0.5% and 1.3%.
It also warned that US unemployment could reach 10%.It also warned that US unemployment could reach 10%.
"Minutes of the last meeting painted a downbeat outlook for global economies and the financial sector, suggesting that any feelings among traders that the worst was behind us could prove premature," said David Jones, chief market strategist at IG Index."Minutes of the last meeting painted a downbeat outlook for global economies and the financial sector, suggesting that any feelings among traders that the worst was behind us could prove premature," said David Jones, chief market strategist at IG Index.
"This combination of news over the last 24 hours has resulted in a predictable knee-jerk sell off - the question from here is whether it is the start of a more sustained slide to correct the impressive gains seen since mid-March," he added."This combination of news over the last 24 hours has resulted in a predictable knee-jerk sell off - the question from here is whether it is the start of a more sustained slide to correct the impressive gains seen since mid-March," he added.
Falling sterling Debt concerns
New data from the UK led to a sharp reversal in the value of pound and dollar, after sterling had reached a new high against the greenback. S&P cited rising UK debt levels as a major concern.
Following the downgrade by Standard & Poor's, sterling fell 3 cents to a low of $1.5514, from its highest in more than six months of $1.5817. UK public debt hit a record £8.46bn in April compared to £1.84bn in the same month last year.
By early afternoon trade one pound was worth $1.571. Standard & Poor's said UK debt could be close to 100% of gross domestic product, and remain at that level in the medium term.
Earlier sterling had risen after minutes from the Federal Reserve revealed the bank considered adding to money supplies, easing concerns over dollar funding. S&P's change of view on the UK economy led to a brief fall in the value of the pound against the dollar.
"The Fed said exactly what the market wanted to hear so it could sell the dollar, although it's too early to say whether its a decisive trend that will hurt the dollar," one portfolio manager at a Japanese firm said. Immediately after the outlook change, sterling fell 3 cents to a low of $1.5519.
But the currency later recovered to hit a fresh 6-1/2 month high of $1.5890 as the dollar bore the brunt of selling pressure.
"No one wants to admit it but there might be investors nervous enough with the extreme levels of indebtedness of the US government so that just the thought of a downgrade would provide an excuse to sell dollars," said Matt Esteve, a trader at Tempus Consulting in Washington.
"If such a thing happened, the impact would be huge."