Europe Sinks Markets

Europe Sinks Markets

By TOM LAURICELLA And ALEX FRANGOS

Global stock and commodity markets fell Monday amid escalating worries about China's economic growth and fresh troubles for Europe's debt-laden countries, signaling that investors are concerned about the strength of the global economy's recovery.

Monday's declines coupled with selloffs over the past month have wiped out some of the optimism that investors had at the start of the year. It's been replaced by fears that many issues of the financial crisis remain unresolved.

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."There are too many negatives for people to be comfortable saying they want to be bullish at this point," said Jeffrey Sica, president and chief investment officer of Sica Wealth Management.

Anxieties about Europe's debt problems have been fanned further by an open dispute between the European Central Bank and euro-zone governments about what to do with Greece's large, and growing, debt burden. As well, a negative report on Italy's credit rating and a crushing defeat in weekend elections for Spain's ruling party intensified concerns that Europe's debt problems were entering a new, critical stage.

"It's really difficult to see how [Europe] can get out of this," says Gabriel Stein, a director at Lombard Street Research in London. He echoes the view of many investors who see some sort of Greek debt default as inevitable, but worry that it will usher in a period of more volatility as investors and government officials struggle to contain the problem.

The change in investor sentiment has combined with worries about China to send stock markets in Asia and Europe into negative territory for the year. Investor concerns have also eroded gains in U.S. markets, where share prices have remained supported by healthy corporate earnings. The worries in other parts of the globe were enough to send the Dow Jones Industrial Average down 130.78 points, or 1.05%, to 12381.26 on Monday. The Dow is down 3.4% for the month.

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.Hong Kong's Hang Seng Index, which fell 2.1% on Monday, is now down nearly 6% in the past month. China's Shanghai Composite fell nearly 3% Monday and is now down more than 1% for the year. In Europe, the Stoxx 600 index dropped 1.7% and the U.K.'s FTSE 100 index sank 1.89%. Both are in the red for the year. On Tuesday morning in Asia, markets were mixed, with Japan's Nikkei Stock Average flat, Australia's S&P/ASX 200 down 0.3% and South Korea's Kospi Composite up 0.2%.

"There's no real compelling reason to buy stocks long-term when situations like this keep creeping back up," says Jason Weisberg, senior vice president at Seaport Securities.

The euro fell sharply, slipping below $1.40 for a while Monday, its lowest level in two months, before recovering to $1.4049 later in the day. The euro, which had rallied strongly from mid-January through the end of April has lost more than 5% this month against the dollar. Investors headed to the safety of U.S. and German debt, while selling sovereign debt of peripheral European countries like Spain, Italy and Ireland. Reflecting the search for a safe-haven, gold prices rose slightly even as most other commodities fell.

The negative news began late Friday, after the outlook on Italy's $1.9 trillion of government debt was lowered to negative by credit-ratings firm Standard & Poor's, which cited weak growth prospects and a slipping economic reform agenda.

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.Then on Sunday, Spain's ruling party suffered a crushing defeat in weekend elections. The heavier-than-expected losses for the Socialist Party of Spanish Prime Minister José Luis Rodríguez Zapatero raise questions about his government's ability to pursue plans to overhaul the euro zone's fourth-largest economy and thereby ward off an international bailout.

This follows a growing political backlash elsewhere in Europe over the bailouts of Greece, Ireland and Portugal that is seen as making any additional support for those countries even harder to galvanize than in the past.

Euro-zone governments are increasingly coming to the conclusion that Greece should seek to postpone repayments on its bonds coming due in 2011 and 2012. ECB officials have responded by warning that any bond restructuring would make the bonds ineligible as collateral at the ECB, a move that would cut off an essential financial lifeline for Greek banks.

By late Sunday in New York, the focus had shifted to the other side of the globe as fresh economic data raised concerns about the pace of economic growth in China, with whom the fortunes of other Asian economies are closely linked.

A preliminary read of an HSBC purchasing managers index for China slowed to its lowest rate in 10 months in May. At 51.1, the index is still reflecting an economic expansion with a reading above 50, but has fallen below its long-term average.

In the U.S., business surveys last week also pointed to a downshift in industrial activity. April's export orders from Taiwan and freight volumes from Hong Kong's airport, the world's busiest cargo hub, point to a mild slowdown in trade growth.

At the same time, Japan is still struggling with the aftermath of the devastating earthquake and subsequent nuclear crisis, prompting investors to scale back on their expectations for a rosy economic environment in 2011.

The question on investor's minds is whether emerging markets, and in particular, China, can engineer a so-called soft-landing in which they halt the rise of inflation but don't tip their economies into recession. Despite the retreat in many markets, most investors expect China to keep growing at a pace well above that of the big developed economies.

"It's premature to conclude there's going to be a massive slowdown," says David Rolley, a portfolio manager in the global bond group at Boston-based money managers Loomis Sayles.

Among the biggest reversals in sentiment has come in the commodity markets, where hedge funds and many other investors had loaded up on bets that would profit from economic strength, particularly in resource-hungry emerging markets.

—David Roman, Brendan Conway and Jonathan House contributed to this article.
Write to Tom Lauricella at tom.lauricella@wsj.com and Alex Frangos at alex.frangos@wsj.com