Elena Moya,  Tuesday 31 August 2010 

• Countries fear US heading for a double-dip recession

• Poor US employment figures expected on Friday

Financial markets around the globe fell today as investors faced a crucial week of data on the US economy.The prospect of poor employment figures on Friday and a snapshot of the state of manufacturing on Wednesday has unnerved markets which fear the world’s biggest economy could be heading for a double-dip recession.

After an emergency meeting with bankers today, Japanese prime minister Naoto Kan said his country was preparing a new Â¥920bn ($10.8bn) stimulus plan and the central bank had added Â¥10 trillion in liquidity injections to help prop up its ailing economy.Japan’s actions followed comments by US Federal Reserve chairman Ben Bernanke over the weekend in which he promised the US central bank “will do all it can” to secure an economic recovery.

But the markets were not convinced by the promises of central bankers. The Dow Jones Industrial Average was down 0.6% to 10,091 points by mid-session in New York, while the DAX index in Germany fell 0.6% to 5912 and France’s CAC 40 lost 0.6% to 3487. Britain’s markets were closed due to the Bank holiday.Investors’ eyes are now fixed on Friday, when the US will release its monthly employment report, which is expected to show the economy lost 110,000 non-farm jobs in August.

Any weak figure will intensify pressure on Bernanke to expand the Fed’s already extensive programme of stimulus for the US economy.”People are concerned policymakers don’t have further tools available – the real problem is final demand, creating demand in the economy to generate consumption and exports,” one fund manager said.

Central banks typically buy bonds and other assets in financial markets to generate growth and demand, but that would not be enough to ignite the global economy, investors warned. “Asset purchases will just increase liquidity, but there’s already plenty of liquidity in the banking system. The problem is demand,” the fund manager said. “It is not good enough to say we’ll do everything we can, people are sceptical.”

Despite the extra stimuli announced in Japan, the yen rose again against its counterparts, gaining 0.6% to Â¥84.7 to the dollar. “While it is encouraging that the Bank of Japan seems to be moving in the right direction, the response from the central bank was underwhelming and came as a disappointment,” said Eric Viloria, currency strategist at Forex.com.

Japanese interest rates are already at 0.1%, while the US has indicated its key target rate for overnight loans between banks would remain in the zero-to-0.25% range “for an extended period,” leaving little room for further cuts. “We need more co-ordinated fiscal and monetary policy, but the members of the US Federal Open Market Committee don’t even agree,” the fund manager said. “If Bernanke was a dictator, he would be already cutting taxes.”

Volatility is expected to continue driving financial markets over the next few weeks, fund managers said. The US stock market rallied 1.7% on Friday following Bernanke’s comments about further intervention in the economy, but fell again today after the commerce department said that disposable incomes, or the money left over after taxes, dropped for the first time since January, trailing estimates.

Particularly weak employment figures will likely affect whether the Fed decides to introduce additional stimulus measures. At the moment, market consensus is that around 90,000 US jobs were lost in August, but that 26,000 were added, if government jobs on the census which have now come to an end are taken out of the equation.

In Europe, attention will also be on Spain, which is scheduled to sell between €3bn and €4bn of government bonds on Thursday – a sale that will indicate investors’ perception of risk in southern European economies.”The best we can hope is that this is just a pause and that the recovery continues,” the fund manager said.Bonds continued as the main beneficiary of the uncertainty, as the gloomy outlook increases chances that interest rates will not be raised to curb inflation.German 10-year bonds rose, pushing their yield down by seven basis points to 2.13%, near last week’s record low of 2.09%. The yield of US 10-year Treasury bonds fell eight basis points to 2.5%.

The lower yields added concerns that central banks are running out of tools to manipulate the economy as they are already at record lows – central banks have pushed bond yields lower as they determine long-term interest rates, such as mortgages.Oil prices fell for the first time in four days. Crude futures were 1% lower at $74.42 a barrel in New York. Gold traded at $1,237.40 an ounce, near a record of $1,266.50 in June, as investors fled equities to grab traditionally safer assets.

Source:Guardian.co.uk