Global stocks plunge as markets seek US assurance

By Ben Perry (AFP) – 2 hours ago

LONDON — Global stocks slumped further Tuesday as soaring Chinese inflation fanned fears of a new sharp economic slowdown while investors looked in hope for fresh assurances from the US Federal Reserve.

European shares plunged in early trade after Asia suffered massive losses, a day after global equities had plummeted on mounting growth and debt strains and ahead of the Fed's latest monetary policy announcements due Tuesday.

London's benchmark FTSE 100 index dived over 5.0 percent as traders also reacted to weak British data and after the capital was hit by a third night of rioting, which some analysts are blaming on the government's austerity drive.

The FTSE was later trading down 3.89 percent at about 0900 GMT. Frankfurt slumped 5.0 percent, Paris shed 3.13 percent, while Madrid and Milan reversed opening gains to slump more than 2.0 percent.

In foreign exchange trade, the euro was higher at $1.4227 while the US currency slid versus the yen. Gold, seen as a safe investment in troubled economic times, hit a fresh record high above $1,772 an ounce.

"It's possible that markets are starting to slowly share a similar view to ours that the Western World financial system built over the last two to three decades might be totally unsustainable," Deutsche Bank analysts said in a note.

"Such a realisation could be cataclysmic for markets and would challenge everything the vast majority of financial market participants have come to take for granted over the course of their careers," they added.

Markets continued to plunge despite a pledge Monday from the G20 group of the world's most top economies to bolster the global economy.

China, the world's second biggest economy, said Tuesday that its inflation rate rose in July to 6.5 percent, the highest level since June 2008 when it reached 7.1 percent.

Some analysts are concerned Beijing might now go too far in tightening monetary policy and trigger a sharp slowdown in the Chinese economy -- which could have dire consequences around the globe -- as it seeks to keep rising prices in check.

Markets were meanwhile waiting to see if the US central bank would outline plans for a new stimulus package later Tuesday, a move some are calling for while others believe the Fed has very few weapons left in its locker.

"There seems to be some optimism coming through markets that (Fed chairman) Ben Bernanke might outline plans for a QE3 (a third round of quantitative easing) package," said IG Markets analyst Ben Potter.

"Even if he does mention this, there will be a lot of speculation as to whether or not it will actually make much difference given the wildly divergent views as to the effectiveness of the previous packages."

US stocks plummeted more than five percent on Monday after Standard & Poor's dealt the United States an unprecedented credit downgrade.

S&P lowered the US long-term sovereign debt rating from AAA to AA+ after markets closed Friday, citing Washington's inability to rein in its mounting deficits.

In Asian on Tuesday, the Tokyo stock market closed down 1.68 percent, Hong Kong dived 5.66 percent, Seoul lost 3.63 percent but Sydney gained 1.22 percent.

Investors exiting stocks moved funds into government bonds, which helped Spain and Italy amid worries the two nations could eventually need EU-IMF bailouts like those handed to fellow eurozone members Ireland, Greece and Portugal.

The pressure on Spanish and Italian 10-year government bonds continued to ease Tuesday, also after the European Central Bank (ECB) intervened in the market as part of efforts to tame the eurozone debt crisis.

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