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Fears of Global Slowdown, 2008-Style “Contagion” Haunt Financial Markets

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Picking up (or rather down) where the left off in the third quarter, financial markets began the fourth quarter with a thud. (See: After Worst Quarter Since '08, Key Events to Watch for in Q4)

Overnight, stocks fell sharply in Asia, most notably Hong Kong where the Hang Seng tumbled 4.4%. Major bourses in Europe fell between 1.4% and 2% as Greece announced it would miss deficit targets for 2011 and 2012, leading to weakness, albeit modest, in early U.S. trading.

Meanwhile, commodity prices continue to fall as manufacturing data from Europe and China reinforced fears of a global slowdown. At 10 a.m. EDT, the U.S. ISM survey came in at 51.6 for September, above expectations and up from 50.6 the prior month, which helped U.S. equities pare early declines. (Update: After a mid-morning rally attempt faltered, stocks careened lower. As of 2:05 p.m. EDT, the Dow was down about 190 points, or 1.7%.)

In addition and concurrently, many hedge funds are unwinding short dollar positions which had been used to fund speculation in commodities such as copper, corn and sugar. Gold, which has sold off sharply in recent weeks as the dollar rallied, was rebounding Monday morning, recently up $33 at $1653 per ounce.

As Henry and I discuss in the accompanying clip, the forces weighing on so-called risk assets remain the same as they've been for the past three months:

  • Fear of a global recession, including a "hard-landing" in China, which released September PMI data earlier than expected. The report showed factory orders rising from August's record low of 50.6 but "China's factory activity typically rises in September as businesses prepare for the Golden Week holiday, but this year's increase was smaller than the average," Reuters reports.
  • Fear of the lack of urgency in Europe about the sovereign debt crisis. EU policymakers are meeting in Luxembourg to yet-again discuss plans to address the Greek crisis but "are looking at a Group of 20 summit in early November as a deadline for showing they are in control of events," Bloomberg reports.
  • Fear of "contagion" in the financial system. Amid ongoing concerns about major European banks, Morgan Stanley shares have fallen over 40% in the past three months, including a 10% decline Friday. "Morgan Stanley, which never regained the prestige and power it had in the years before the 2008 crisis, is quickly becoming a focal point for investors who fear that it may not be able to weather another financial storm," The NYT reports.

Citing the quiet period ahead of third-quarter results, Morgan declined to comment in the NYT report. Undoubtedly, the company would say they have ample liquidity and are being unfairly targeted by short-sellers. That may be true. But the truth is "nobody knows" what Morgan's exposure is to Europe, either directly or via derivatives contracts, as Henry notes.

At this point, about the best think you can say about the stock market is just about everybody thinks it's going lower, at least in the near-term. Then again, sometimes the majority is right, even in the financial markets were "contrarian" thinking is often lauded and occasionally rewarded.

Aaron Task is the host of The Daily Ticker. You can follow him on Twitter at @atask or email him at altask@yahoo.com

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