It’s amazing how a central bank governor and then a Prime Minister using the “R” word to describe their country’s economy, to get the attention of markets around the world.

Big fall on markets overnight with the Dow down 5.7%, Nasdaq off 4.7% and the wider S&P 500 off a large 6.1% as recession fears resurfaced in investors minds (Wednesday, it must be time to fret about the inevitable).

The Dow lost 514 points, after having fallen as much as 698 points during the session. The loss was the Dow’s 7th worst ever. The S & P 500 index closed at its lowest level since April 2003 and Nasdaq ended at its lowest since June 2003. That was after big falls in Asia and in Europe.

The Canadian dollar had its biggest fall since 1971, falling more than 3.5% yesterday to take the loss this month to around 15%. Falling oil and commodity prices were the cause, but the Australian dollar traded roughly steady (around 67 US cents).

Gold fell sharply, shedding $US38, or 5% to end at $US729, copper fell almost 10% to a new three year low of $US1.81 a pound and oil slumped more than 7% to $US67 a barrel, a 16 month low. The US dollar rose, with the Australian dollar down at 67.70 US cents.

In fact the word “recession” can act a bit like the use of the word fire in a crowded theatre, or “sell” in a skittish stockmarket.

Yesterday we reported on the admission by Bank of England Governor, Mervyn King that Britain was in recession: a pointed that was echoed by Prime Minister Gordon Brown in London.

Even though they were talking about the tanking UK economy (official figures out Friday night, our time) will confirm the comments, they were enough to send currencies all over the place (and knock more than a cent off the Australian dollar, and then a bit more) as investors refocused on the outlook for various economies.

The pound is off more than 6% this week, so far and has fallen from $US2 at the start of the year to a five-year low of $US1.63. Our currency is down from 98 US cents in July to around 67 US cents this morning, but with Britain’s housing slump, appalling household finances and large external deficit (is that Australia?), economists reckon a quick rebound won’t happen.

Like the Reserve Bank of Australia (And New Zealand this morning) the Bank of England is going to cut its rates as deeply and as quickly as possible.

Although the UK will have a much tougher time than many other economies, the use of the ‘R’ word switched attention from falling interest rates and the thawing credit freeze, back to the grim realities of slowing economies, like we saw in the US last week in the wake of the fall in retail sales in September (which shouldn’t have been all that surprising, given what consumers are going through)

As a result, Asia was weak, with Tokyo and South Korea down 5% and Australia off 3.4%, but with the futures market signalling an even steeper 191 point or near 5% fall today. Europe weakened further and the US saw another day of big moves, downwards.

The falls were sharpest in the US where several leading companies produced third quarter results that disappointed. Rather than accept that the results in fact reflected the reality of the economy and its immediate outlook, US investors threw up their hands and sold, claiming this was bad news. In fact it was what should have been anticipated had investors and analysts been realistic about the US.

AT&T and Boeing slid 7.6% and 7.5% after their reports were lower than expected. Drug giant Merck revealed lower than expected figures and cut 12,000 jobs, McDonalds produced better than expected figures (thanks to international sales), but lost ground. Energy and resource stocks fell as oil and metal prices dropped. The big ConocoPhillips group lost more than 9% after its production figures fell short of expectations.

Wachovia, the bank, reported a huge $US24 billion quarterly loss (compared to a profit a year ago). Wachovia is being bought by Wells Fargo and much of the big loss is related to charges associated with that merger.

BHP Billiton’s comments on China (but not those desperate late rumours of a sweetened bid for Rio) added to the damage caused to resource stocks from lower commodity prices. Freeport-McMoRan Copper and Gold reported worse than expected quarterly profits in the US and the shares plunged 17.8%.

And its not going to get better with online retail giant, Amazon surprising with a cut in its forecasts. Amazon said its 2008 sales that may fall $US1 billion less than analysts estimated, sending the shares down 14% in late Nasdaq trading.

Amazon.com’s reduced forecast and EBay’s projection last week for its first quarterly sales decline suggest online retailers won’t be spared the effects of the worst financial crisis since the Great Depression heading into the holiday fourth quarter, which last year accounted for more than 40% of Amazon’profit.

The company said annual sales will be $US18.46 billion to $US19.46 billion, compared with the company’s July forecast of as much as $US20.10 billion. Operating income will be no more than $US876 million, compared with a previous high of $US920 million.

In New Zealand the country’s Reserve Bank chopped its key interest rate this morning by a record 1% to try and offset the impact of a recession and the global financial crisis. The RBNZ in effect matched the October 7 Reserve Bank of Australia rate cut of 1%. That would take the official cash rate to 6.5%, compared with Australia’s 6%.

New Zealand’s economy is already in recession, which has prompted the RBNZ to start lowering borrowing costs in July to kick-start consumer and business spending.

Up till today, the central bank had cut rates by 0.75% in two cuts of 0.25% and then half a per cent as more and more figures emerged to show the economy was heading towards recession with two quarters of negative economic growth.

Peter Fray

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