Investors Remain on Edge Amid Recession Worries

Markets around the world remained volatile as investors worried that a flurry of central bank moves this week would not be enough to stave off a global recession.

US stocks bounced back and forth between positive and negative territory as Japanese stocks tumbled to 26-year lows and European markets fell heavily but then pared their losses in chaotic trade.

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Oil prices continued to slump on expectations that the economic slowdown will slash demand.

Little that officials said could convince panicky investors that governments can stem the fast-spreading crisis that is menacing financial markets, economic growth and company earnings.

Meanwhile, U.S. banks lined up for government cash, the Group of Seven expressed concern about the soaring Japanese yen, and countries in Asia and Europe took emergency actions to shore up their financial positions.

The credit crisis, which began with failing U.S. mortgages, has mushroomed into a worldwide rout as investors sell stocks and commodities, shun risky emerging markets and seek out only the safest of government bonds and currencies.

Still, there were some promising signs Monday. Government efforts to revive credit markets were beginning to pay off as borrowing costs eased, and major U.S. stock indexes were not as far down as some had feared.

The Federal Reserve set the terms for its latest program to buy commercial paper, bolstering a market that is vital for funding companies' day-to-day business activities. Financial companies including Comerica, SunTrust Banks and State Street agreed to sell stakes to the U.S. Treasury Department as part of the $700 billion rescue plan approved by Congress earlier this month.

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The U.S. central bank is almost certain to trim short-term interest rates at its policy-setting meeting later in the week, and British Prime Minister Gordon Brown hinted that central bank action may be more widespread.

"Now inflation is actually coming down over the next few months and that will mean that it gives scope to all the monetary authorities, including the Bank of England, round the world to make a decision about interest rates," he told the BBC.

Despite the less-dire-than-expected start on Wall Street, world financial markets reacted sharply to the twin perils of financial crisis and global recession.

Volatility has surged across financial markets as investors are forced to sell assets—which they bought with borrowed money—to repay creditors or cover margin calls as asset prices fall and credit limits are breached.

This deleveraging is crucial to restoring the long-term stability and health of the financial system, but it is the speed and severity with which it is happening that is fueling investor panic and unnerving policymakers.

It has most recently hit currency markets, described by David Shairp, global strategist at JPMorgan Asset Management as "the new apex of the crisis." A brief G7 statement focused on the yen, fanning speculation the Bank of Japan would intervene in curreny markets for the first time in four years.

"We are concerned about the recent excessive volatility in the exchange rate of the yen and its possible adverse implications for economic and financial stability," said the group, comprising the United States, Japan, Germany, Britain, France, Italy and Canada.

Theyen's rapid ascent against the dollar and euro is making Japanese exports much more expensive at a time when the country's overseas customers are lurching toward recession.

The dollar, however, is rising against major currencies except for the yen, so there was skepticism about whether any coordinated action on the currency would be forthcoming.

The U.S. currency was up more than 0.7 percent against a basket of major currencies on Monday.

The crisis was also taking a heavy toll on emerging markets as investors withdrew funds and commodity-based economies struggled with falling prices for everything from corn to copper.

The IMF said it had reached an agreement with Hungary to provide a "substantial financing package" in the next few days that would include funding by the European Union and some individual European governments.

It agreed on a $16.5 billion loan for Ukraine on Sunday. Turkey's central bank governor, Durmus Yilmaz, said the country did not need IMF cash now, but a standby arrangement with the fund might be beneficial.

"The focus has shifted to vulnerabilities in emerging markets, and policy initiatives aimed at reducing the impact of dysfunctional global credit markets on emerging market countries will be key in the short-term," said Goldman Sachs analyst Jens Nordvig.

Copyright 2008 Reuters. Click for restrictions.