European and U.S. stock markets slid Monday alongside oil prices as the more optimistic investors reined in their expectations for the global economy after the World Bank warned that the downturn would be deeper than it previously predicted.
The Washington, D.C. multilateral lender said the world economy will shrink 2.9 percent in 2009 — worse than its previous forecast for a 1.7 percent contraction — as banks continue to get their balance sheets back into shape.
The warning tapped into a growing mood in the markets that the improvement in the economic data has not been strong enough to justify the stock market rally since March. Last week, the world's major indexes saw broad losses, while oil prices slipped back from six-month highs above $70 a barrel.
"The concern seems to be that we were all perhaps a little too soon in thinking that the worst of the economic slowdown was behind us, and for now at least, discretion may be the better part of valor — until there are more concrete signs of a sustainable recovery," said David Jones, chief market strategist at IG Index.
In Europe, the FTSE 100 index of leading British shares closed down 111.88 points, or 2.6 percent, at 4,234.05, while Germany's DAX ended 146.06 points, or 3 percent, lower at 4,693.40. The CAC-40 in France was 98.02 points, or 3 percent, lower at 3,123.25.
On Wall Street, the Dow Jones industrial average was down 154.70 points, or 1.8 percent, at 8,366.44 around midday New York time while the broader Standard & Poor's 500 index fell 22.56 points, or 2.5 percent, at 898.67.
In oil markets, benchmark crude for July delivery fell $2.70 to $66.85 a barrel.
That decline, on top of the near $2 decline on Friday, hit oil stocks around the world and pushed the energy-dependent MICEX, Russia's main stock market, down nearly 8 percent.
Equities and oil prices have rallied hard in the last few months primarily on hopes that the U.S. economy will recover from
recession sooner than anticipated. That optimism has dissipated, if not quite evaporated, and analysts say investors need clearer evidence that the world economy and company earnings are recovering to make sense of stock valuations. In March, many investors saw valuations around the world as particularly cheap and started buying into the market.
"Until now markets have been able to find support from the fact that the global economy was not about to fall off a cliff and financial markets were not going to implode. Now markets need more," said Mitul Kotecha, an analyst at Calyon Credit Agricole.
In light of the current unease, investors will be closely looking at Wednesday's statement from the U.S. Federal Reserve. Though the Fed is widely expected to keep its benchmark interest rate in the range of zero to 0.25 percent, investors will be focusing on what it says about current economic prospects and how long it expects to keep monetary policy as accommodating as it is.
Most analysts think the Fed has a difficult balancing act — expressing the view that the worst of the
recession is over at the same time as not spooking investors into thinking that interest rates will rise any time soon.
There were some gainers Monday, most notably mining company Anglo American PLC, which rose around 6 percent after Xstrata PLC made a tentative merger approach. Offsetting Anglo's gains was British Airways PLC, which fell around 8 percent, after Richard Branson, the boss of archrival Virgin Atlantic, suggested the flag carrier was near worthless.
Earlier in Asia, optimism about China's economic outlook helped shares advance, with Japan's Nikkei 225 stock average closing up 40.01 points, or 0.4 percent, to 9,826.27, and Hong Kong's ending 138.62 points, or 0.8 percent, higher at 18,059.55.
Elsewhere in Asia, South Korea's Kospi climbed 1.2 percent to 1,399.71 and Australia's benchmark added 0.5 percent to 3,918.2.
In currencies, the dollar fell 0.4 percent to 95.86 yen while the euro declined 0.6 percent to $1.3852.
