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Markets in tailspin, UK shrinks, China outlook grim

LONDON/NEW YORK - Japan led a global stock market rout on Friday that saw U.S. stock index futures tumble so sharply they had to be frozen, and news that Britain's economy contracted during the third quarter deepened fears of a worldwide recession.

Mounting evidence of a global economic downturn, born of the worst financial crisis in 80 years, also prompted extreme currency volatility. The yen rocketed to multiyear highs against the dollar and euro, with the euro/yen rate down a staggering 10 percent at one point.

Britain's economy shrank 0.5 percent in the third quarter and euro zone figures showed the 15-nation currency bloc was already in recession, analysts said.

Stock markets were in freefall around the world as panicked investors moved to liquidate risky positions. Japan's Nikkei index ended down 9.6 percent and European shares dropped 7.6 percent.

In New York December Dow Jones futures were down 6.3 percent, Standard & Poor's 500 futures were off 6.6 percent and Nasdaq 100 futures were down 6.8 percent.

All three contracts lost the maximum amount permissible before the start of futures trading in the United States.

Both the New York Stock Exchange and Nasdaq said trading would open as normal at 9:30 a.m. (1330 GMT).

‘The global financial crisis has been constantly spreading and worsening, creating a severe shock to global economic growth,’ Chinese Premier Wen Jiabao told an Asia-Europe Meeting of 27 EU member states and 16 Asian nations.

OPEC, meeting in emergency session, agreed to cut oil output by 1.5 million barrels per day in an attempt to halt the steep slide in the price of oil. But the price of U.S. crude fell 7 percent to $63 as economic gloom overshadowed the cut.

MORE BAD NEWS FROM COMPANIES

A survey of companies showed the euro zone private sector economy on track for its worst performance since the recession of the early 1990s.

The October Markit Eurozone Flash Purchasing Managers' Indexes show services business contracting at its fastest pace since collapsing after the Sept. 11, 2001 attacks. Factory output was shrinking at the greatest rate in at least a decade.

‘This is it, we are clearly into recession,’ said Gilles Moec, economist at Bank of America.

A range of corporate giants reeled too, not just the banks that were hit first and hardest by a financial crisis that began with a U.S. housing market collapse and now threatens recession across much of the globe.

Sony's shares plunged to a 13-year low after it halved its profit forecast.

French carmaker PSA Peugeot Citroen cut its full-year operating margin target and said it planned to make ‘massive’ production cuts in the fourth quarter after posting a 5.2 percent fall in third-quarter sales.

Air France-KLM also succumbed to the financial crisis with a profit warning, sending shares in Europe's largest airline group down about 7 percent.

GOVERNMENT ACTION

Authorities around the world have committed nearly $4 trillion to a variety of plans including deposit and debt guarantees and taking stakes in struggling banks.

Foreign exchange analysts say major central banks urgently need to calm wild swings in major exchange rates, the latest manifestation of the deepening global financial crisis and one that has sent the U.S. dollar and Japanese yen soaring against European and emerging market currencies.

In Washington, the Treasury Department and bank regulators plan to announce as soon as this weekend the next batch of banks to receive capital injections as part of its bank bailout package, a source familiar with the Treasury's thinking said.

European leaders want China, the world's fastest-growing major economy, to help shape global financial reforms.

‘There was large agreement that such answers must be found internationally,’ German Chancellor Angela Merkel said after talks with Chinese President Hu Jintao in Beijing. ‘I think China will make its contribution to the stabilization of the world economy.’

Hu said the outlook was ‘grim and complicated.’

Leaders of the world's major industrial nations and other big economies will discuss the crisis at a special summit on Nov. 15 in the United States. Chinese spokesman Liu Jianchao said his government was actively considering attending.

IMF PACKAGE

The International Monetary Fund is hurrying to approve by early November a package allowing certain emerging economies exchange their currencies for U.S. dollars to ease short-term credit strains, officials familiar with the plans said.

The facility would be available to a group of ‘top tier’ emerging market countries -- those well-run but may be having difficulties obtaining credit, the officials told Reuters.

So far, Hungary, Iceland, Belarus, Ukraine and Serbia are in talks with the IMF on programs backed by financing.

Interbank lending, frozen recently as banks feared peers might collapse, has shown some signs of thawing.

In London, interbank rates for overnight dollar deposits were indicated in a range of 0.95-1.25 percent, but the cost of borrowing longer-dated dollars rose as banks remained wary of lending to each other for durations extending into next year.

Markets expect the Federal Reserve to cut U.S. rates sharply next week to help head off a sharp recession. To that end, investors will scrutinize U.S. home sales data due later.