Global Stock Rout, Again (EFU)

Larry Levinson:  Equity markets around the world declined in tandem Thursday, with European markets dropping the most on a percentage basis after banks cut their outlook for growth around the world.

Morgan Stanley cut global GDP growth forecasts to 3.9% in 2011 and 3.8% in 2012, from 4.2% and 4.5%, respectively, with U.S. GDP growing 3.9% in 2011, down from and earlier prediction of 4.2%, and GDP growth hitting 3.8% in 2012, down from an earlier forecast of 4.5%.

Morgan Stanley and Deutsche Bank also trimmed predictions for growth in China, a major driver of economic activity. Morgan Stanley cut its forecast for 2012 GDP growth to 8.7% from 9% and Deutsche Bank trimmed its outlook for 2011 to 8.9% from 9.1%. Morgan Stanley’s 2011 prediction for 9% growth was left unchanged.

“Our revised forecasts show the U.S. and the euro area hovering dangerously close to a recession — defined as two consecutive quarters of contraction — over the next 6-12 months,” Joachim Fels, who co-heads Morgan Stanley’s global economics team, said in a research note dated Wednesday.

“Recent policy errors – especially Europe’s slow and insufficient response to the sovereign crisis and the drama around lifting he U.S. debt ceiling — have weighed down on financial markets and eroded business and consumer confidence,” the Morgan Stanley note said.

The Dow Jones Industrials fell as much as 528 points, or almost 5%, the Nasdaq dropped 4.39% or 110 points and the S&P 500 declined 4.14% or 49 points.

In Asia, stocks closed the previous trading day lower, with India’s Sensex the biggest loser, down 2.2% or more than 370 points. Hong Kong’s Hang Seng fell 1.34% or 272 points, Japan’s Nikkei was off 1.25% or 113.50 points and the Shanghai Composite shed 1.61% or 41 points.

Banks in Europe were hurt after the Wall Street Journal reported that regulators in the U.S. are bringing greater scrutiny to the banking operations. Federal and state officials are meeting with local representatives of some of Europe’s largest banks to ensure they are ready to withstand the debt crisis in their home markets, the paper said.

European stock losses ranged from 4% in London to more than 5% in Germany and Italy.

“There’s a continued general malaise on global economic activity. People continue to downgrade their expectations on growth on a worldwide basis,” Michael Mullaney, who helps manage $9.5 billion at Fiduciary Trust told Bloomberg. ”There’s concern about funding problems. That’s making us very nervous here and as such we want to take risk out of portfolios at least for the immediate future.”

The ProShares UltraShort MSCI EAFE ETF (NYSE:EFU) has been rising on all the bad news.

Written By Larry Levinson From Emerging Money

Emerging Money provides insightful and timely information about the increasingly important world of Emerging Market investments. CNBC Emerging Markets Contributor Tim Seymour leads the team of Emerging Money to bring you cutting edge global news and analysis.

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