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Business: Global shares sink after major US index enters correction

BEIJING (AP) — Global stock prices sank Friday after the Dow Jones industrials on Wall Street plummeted more than 1,000 points, deepening a week-long sell-off.

Markets followed U.S. stocks down after the Dow, coming off a record high, entered a correction — or a 10 percent decline from its latest peak — for the first time in two years.

In early trading, France’s CAC 40 lost 0.4 percent to 5,144.35, adding to Thursday’s 2 percent decline, and London’s FTSE 100 shed 0.3 percent on top of the previous day’s 1.5 percent retreat. Germany’s DAX was unchanged.

Asian markets fell more sharply. The Shanghai Composite Index tumbled 5.5 percent before ending the day down 4 percent at 3,129.85. Tokyo’s Nikkei 225 lost 2.3 percent to 21,382.62 and Hong Kong’s Hang Seng retreated 3.1 percent to 29,507.63.

On Wall Street, futures for the Dow and Standard & Poor’s 500 index were up an unusually large 0.7 percent, suggesting traders might be trying to take advantage of lower prices to buy.

Financial analysts regard corrections as a normal event but say the latest unusually abrupt plunge might have been triggered by a combination of events that rattled investors. Those include worries about a potential rise in U.S. inflation or interest rates and whether budget disputes in Washington might lead to another government shutdown.

On Wall Street, regular investors and experts alike had mixed thoughts about the outlook for the market amid extremely volitile week of trading on the New York Stock Exchange. (Feb. 8)

“Markets are down again today, maybe unnerved by fears that the U.S. Senate will not pass a budget bill in time to avoid a U.S. government shutdown,” said Rob Carnell of ING in a report. “With financial markets vulnerable at the moment, this was not great timing for such political brinksmanship.”

Chinese markets fell despite unexpected strongly trade data Thursday.

Elsewhere in Asia, Seoul’s Kospi 1.8 percent to 2,363.77 and Sydney’s S&P-ASX 200 lost 0.9 percent to 5,838.00. India’s Sensex retreated 1.1 percent to 34,017.83 and benchmarks in New Zealand, Taiwan and Southeast Asia also fell.

In Europe, markets were unnerved Thursday by the Bank of England’s indication that it could raise its key interest rate in coming months due to stronger global economic growth.

U.S. stocks started to tumble last week after the Labor Department said workers’ wages grew at a fast rate in January.

Investors worried rising wages will hurt corporate profits and could signal an increase in inflation that could prompt the Federal Reserve to raise interest rates at a faster pace, putting a brake on the economy.

On Wall Street, many companies that rose the most over the last year have borne the brunt of the selling. Facebook and Boeing have both fallen sharply.

The S&P 500, the benchmark for many index funds, shed 100.66 points, or 3.8 percent, to 2,581. Even after this week’s losses, the S&P is up 12.5 percent over the past year. The Nasdaq composite fell 274.82 points, or 3.9 percent, to 6,777.16.

The market, currently in its second-longest bull run of all time, had not seen a correction for two years, an unusually long time. Many market watchers have been predicting a pullback, saying stock prices have become too expensive relative to company earnings.

“We may have seen the worst, but it’s too early to say for sure. However, our view remains that it’s just another correction,” said Shane Oliver of AMP Capital in a report.

Corrections of up to 15 percent “are normal,” said Oliver.

“In the absence of recession, a deep bear market is unlikely,” he said.

American employers are hiring at a healthy pace, with unemployment at a 17-year low of 4.1 percent. The housing industry is solid and manufacturing is rebounding.

Major economies around the world are growing in tandem for the first time since the Great Recession and corporate profits are on the rise. That combination usually carries stocks higher. But stock prices have climbed faster than profits in recent years. Many investors justified that by pointing out that interest rates were low and few alternatives looked like better investments. Fast rising interest rates would make that argument much less persuasive.

In currency markets, the dollar edged up to 109.18 yen from Thursday’s 108.73 yen. The euro gained to $1.2270 from $1.2248.

Benchmark U.S. crude lost 64 cents to $60.51 per barrel in electronic trading on the New York Mercantile Exchange. It fell 64 cents the previous session to $61.15.

Brent crude, used to price international oils, lost 51 cents to $64.33 in London. It retreated 70 cents on Thursday to $68.81.

___

WASHINGTON (AP) — The stock market may just have fired off a warning shot to the Trump administration and Congress about their plans to blow up the size of the federal deficit.

The anxiety that has gripped the market this week appeared to escalate Thursday just as President Donald Trump and lawmakers were setting the government up for annual budget deficits that would routinely exceed $1 trillion. The higher that deficits rise, the more likely it is that interest rates will surge, too, and undercut corporate profits, stock prices, consumer spending and the overall economy.

Administration officials have downplayed the risk of simultaneously slashing taxes and boosting spending, arguing that the result will be faster growth that will then shrink the debt. But the higher deficits would come just as the Federal Reserve is on course to continue — and perhaps accelerate — the pace of its short-term rate hikes. The Fed’s rate increases will likely lead, in time, to higher borrowing rates for consumers and businesses and likely slow economic growth.

One tenet of modern economics has been that the government should run higher deficits during a recession to help the economy heal but then reduce those deficits when the economy is relatively healthy, as it is now.

The market’s plunge over the past week was initially ignited by fears of higher inflation and interest rates. But investors have also had to consider a new threat: A two-year government funding deal that would add about $300 billion to budget deficits from higher spending. The Fed might have to respond by raising rates more aggressively to counter the stimulative effect of the spending increases.

Increasing budget deficits deliver a “double whammy” to investors, said Mark Zandi, chief economist at Moody’s Analytics. “Treasury is going to be issuing a lot more bonds to finance deficit-financed tax cuts and spending increases … and the Federal Reserve will have to be more aggressive in raising interest rates” to offset the stimulus.

When a government borrows more, its increased demand for debt typically leads to higher interest rates charged on that debt.

The bipartisan funding deal had seemed likely to clear the Senate on Thursday but then was held up after the markets closed when Sen. Rand Paul, a Kentucky Republican, warned that lawmakers would be “spending us into oblivion.”

Before the market closed Thursday, stocks had accelerated their dive, with the Dow Jones industrial average tumbling more than 1,000 points, or 4 percent. From its January high, the Dow has now lost over 10 percent — the definition of a market correction. Before this week, the stock market’s steady climb deep into record territory had led Trump to boast repeatedly of its performance under his watch. Now, its sudden and steep reversal has become a source of concern.

The yield on the benchmark 10-year Treasury note, in the meantime, has been steadily rising, reaching 2.83 percent after having begun the year at barely 2.4 percent. The increased yield has reflected in large part an outlook for higher inflation. Now that the projected budget deficit for 2019 would equal possibly 5 percent of the economy — a record percentage when unemployment is so low — bond yields could rise further and herald higher rates on mortgages and other long-term loans.

John Cochrane, an economist at the conservative Hoover Institution, said there are two likely scenarios right now about what’s happening in the markets. The first is that investors are adapting to higher rates that merely reflect strong economic growth. The second is that the markets see an already troubling national debt worsening right before mounting costs for Social Security and Medicare will require even more borrowing.

Cochrane said his guess is that the stock market losses so far reflect the anticipation of higher growth and interest rates. But it’s also clear that investors are struggling to digest an enormous amount of information and stocks are swinging violently as a result.

“What you’re seeing with all this volatility is the process of digestion,” he said. “It’s like what happens after the night you go out for too many tacos.”

Raj Shah, a White House spokesman, told reporters that the president’s forthcoming budget plan would lead to stronger economic growth, which, he said, would then reduce the deficits. No outside economist has forecast that the $1.5 trillion worth of tax cuts Trump signed into law can generate enough growth to pay for themselves.

The Committee for a Responsible Federal Budget, a nonprofit that seeks to limit the national debt, estimates that the government funding deal would cause the 2019 deficit to balloon to $1.2 trillion, with trillion dollar deficits to continue “indefinitely.”

That borrowing could temporarily boost growth in the next few years because there would be more money flowing through the economy. But growth would likely suffer later once taxpayers had to pay down the debt.

“The budget deficits we are seeing will accelerate economic growth in the short-run — through 2018 and maybe into 2019,” said Sung Won Sohn, economist at California State University, Channel Islands. “After that, we could actually see slower rates of growth.”

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