US stocks fell sharply in early trade on Tuesday, driven by a sharp retrenchment in the US services sector last month that raised fears of a recession and contributed to stock weakness in Europe and Asia. Concerns the US credit crisis is spreading beyond mortgages to consumer credit compounded fears of weaker global growth.
Government bonds rallied on the recession fears, fuelled by the steep drop in the US Institute for Supply Management''s index of non-manufacturing industry to levels not seen since the 2001 recession. "It''s another recession marker on the radar screen," said Cary Leahy, economist at Decision Economics in New York.
The market volatility came on the biggest day in US presidential nominating contests, known as Super Tuesday. Twenty-four of the 50 states were holding nominating contests for the Democratic and Republic parties, and at the end of the day there could be clear winners for the final run to the November presidential election.
In addition, increasingly volatile markets and rising recession fears will top the agenda at the Group of Seven finance ministers and central banker governors meeting in Tokyo on Saturday.
In Europe, surveys of purchasing managers showed Germany''s service sector contracted for the first time in 4-1/2 years in January. Service sectors in Spain and Italy also shrank and overall eurozone services growth decelerated to a virtual standstill.
The European Central Bank is not expected to lower interest rates at its policy meeting on Thursday. However, speculation it may be forced to cut sooner than currently forecast sent the euro down more than 1 percent against the US dollar. It was trading at $1.4652.
The sharp rise in the dollar against the euro triggered selling in the spot gold XAU=> market. Gold fell more than 2 percent to a two-week low of $885.30 an ounce. Gold surged to a record high of $936.60 on Friday.
In early Wall Street trading all major stock indexes were lower. The Dow Jones industrial average was down 192.33 points, or 1.52 percent, at 12,442.83. The Standard & Poor''s 500 Index was down 21.29 points, or 1.54 percent, at 1,359.53. The Nasdaq Composite Index fell 28.06 points, or 1.18 percent, to 2,354.79.
US financial institutions, including American Express Co, Wachovia Corp and Wells Fargo & Co, were downgraded on Monday as analysts pointed to US consumers falling behind on loan payments. That sent share prices lower on Monday and carried over into Tuesday''s trade
US Treasury debt prices were higher. The benchmark 10-year US Treasury note gained 28/32, with the yield at 3.5388 percent. Price moves inversely to yields "The ISM non-manufacturing index tells us that the recession has indeed arrived. For the Fed, it justifies their aggressive action and I think that low yields in the market are probably justified," said Jane Caron, chief economic strategist at Dwight Asset Management, in Burlington, Vermont.
The eurozone benchmark 10-year government bond was higher, driving its yield down to 3.84 percent. In Europe, the FTSEurofirst 300 stock index fell 2.37 percent, outstripping a 2.12 percent loss on MSCI''s world equity index. Japan''s Nikkei stock index closed down 0.8 percent, with Honda Motor Co Ltd under pressure due to the US recession fears. Crude oil prices fell $1.67 to $88.35 a barrel, a loss of 1.83 percent. Prices of corn, soybeans and copper also fell, while wheat rose.
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