Banking gloom hits world markets despite Obama

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LONDON — World stock markets fell sharply Tuesday as ongoing gloom surrounding the banking sector offset any optimism generated by the inauguration of Barack Obama as president.

In Europe, the FTSE 100 index of leading British shares closed down 17.07 points, or 0.4 percent, to 4,091.40, while Germany's DAX fell 76.29 points, or 1.8 percent, to 4,239.85. France's CAC-40 was down 64.41 points, or 2.2 percent, to 2,925.28.

In the U.S., the Dow Jones industrial average slumped 156.74 points, or 1.9 percent, at 8,124.48 in midday trading in New York, while the broader Standard & Poor's 500 index dropped 22.89 points, or 2.7 percent, at 827.23. Wall Street had been closed on Monday for the Martin Luther King holiday when European markets fell amid mounting fears about the banks.

"The financial sectors are continuing to lead the equity markets lower," said Hans Redeker, an analyst at BNP Paribas.

With such uncertainty around the world's banking system, investors were wary of dipping their toes in the markets despite some hope that the incoming Obama administration will be able to engineer a recovery in the world's largest economy through its massive fiscal stimulus plan.

U.S. banks were under renewed pressure Tuesday as traders returned to their desks following the long weekend. JP Morgan Chase fell 11 percent while Bank of America Corp. shed around 19 percent of its value despite last week's bailout from the U.S. administration.

The latest bout of selling in the U.S. was stoked Monday by the 67 percent collapse in the share price of Royal Bank of Scotland Group PLC after it forecast a record 28 billion pound ($41.3 billion) loss for 2008.

Though RBS has perked up around 11 percent Tuesday, other British financial stocks were being heavily sold again, with newly-merged Lloyds Banking Group PLC down another 31 percent as investors worried about the possibility that it too may end up under state control.

"With RBS shares falling like a proverbial stone yesterday and Lloyds being further savaged today this period of twenty-four hours appears to be when markets finally decided to call the bluff of both the banks and the U.K. government as they searched for yet another possible nationalization scalp," said Howard Wheeldon, senior strategist at BGC Partners.

Earlier, Asian stocks suffered as investors in the region digested the previous session's European banking rout.

Japan's Nikkei 225 stock average lost 2.3 percent to 8,065.79, paring losses in the afternoon after dipping under the key 8,000-level during the morning session.

Elsewhere, Hong Kong's Hang Seng index lost 2.9 percent and Australia's S&P/ASX200 fell 3.1 percent. Benchmarks in South Korea, Taiwan and Singapore also retreated.

Financial shares sank across Asia, with Sumitomo Mitsui Financial Group Inc. down 3.8 percent, and Mizuho Financial Group Inc. 6.2 percent lower.

Chinese shares bucked the trend in Asia on hopes the government would soon release its stimulus plan for the petrochemical sector. The benchmark Shanghai Composite Index closed up 1.4 percent, buoyed by steel producers and medical issues, which surged after China reported several bird flu death cases recently.

Meanwhile, the dollar fell 0.5 percent to 90.20 yen, while the euro fell 1.2 percent to $1.2937.

The strongest focus was on the British pound, which slumped to a seven and a half year low against the dollar amid fears that Britain's credit rating could be downgraded if the government has to take over ailing banks.

The pound was 3.4 percent lower at $1.3961, having earlier fallen to $1.3936, its lowest since July 2001. As recently as July 2008, the pound was trading as high as $2 before concerns about the banking system and the wider economy as a whole prompted a sharp reverse.

The selling of the pound gathered pace in the wake of Monday's announcement from the British government that it was bailing out the banking sector for the second time in three months.

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Associated Press Writer Tomoko A. Hosaka in Tokyo contributed to this report.

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