By Brian Blackstone in Frankfurt, Tommy Stubbington in London and Min Zeng in New York
Stock markets around the globe tumbled as oil briefly fell below
$50 a barrel and fresh worries arose about Europe's economy,
stoking fears of SHYdeflation.
The euro dropped to its lowest level against the dollar since
2006, reflecting concerns Greece could be headed for a messy exit
from the common currency. Adding to pressure on the euro was a
round of tepid inflation readings. That data raised expectations
the European Central Bank will soon beef up its stimulus program,
which investors interpreted as bearish for the euro.
Major stock indexes fell 3% in France and Germany and 2% in
Britain. U.S. stocks slumped, with the Dow Jones Industrial Average
sliding 331.34 points, or 1.9%, to 17501.65, its largest point and
percentage drop since Oct. 9. The retreat was led by steep declines
in energy shares and a lesser pullback in large banks.
Investors snapped up safer assets such as gold, which rose 1.5%,
and government bonds. The yield on the 10-year U.S. Treasury note
slid to 2.038%, its lowest since May 2013. Yields fall when prices
rise.
Roiling markets internationally were a host of economic and
political indicators pointing to weakness and instability in
Europe, despite signs of increased vigor in the U.S. economy.
In Europe, an unexpectedly soft inflation report from Germany
raised concerns the eurozone faces a potentially lengthy period of
outright declines in consumer prices, which may make it harder for
the region to recover from its lengthy economic slump.
Low inflation or falling prices can have positive economic
effects in the short term, particularly if they are driven by lower
energy prices that free up cash to spend in other areas. The risk
is that people expecting prices to hold steady or even fall might
put off purchases or investments, leading to weaker economic
activity overall.
"The market fears that the oil-price decline is telling us
something bad that we don't know about global growth," said Eric
Stein, co-director of global income at money manager Eaton Vance
Management, which has $297.7 billion in assets.
Shares of several major European banks dropped 5% or more,
highlighting concerns about the pace of growth on the Continent and
the capacity of the eurozone's financial system to weather problems
tied to Greece.
Investors remain generally upbeat on the outlook for shares in
the U.S. Even so, traders said drops of 3.1% in Morgan Stanley,
Goldman Sachs Group Inc. and J.P. Morgan Chase & Co. on Monday
underscore fears that economic growth and profits will disappoint
investors who have enjoyed a five-year-long rally in the S&P
500.
"In the end, it is all about inflation," said Anthony Cronin, a
Treasury-bond trader at Société Générale SA. "Falling oil prices
are making investors nervous because the rest of the world is
trying to avoid deflation."
Expectations that central-bank action could be on the way this
month have kept bond yields in the eurozone pinned close to record
lows. Germany's 10-year bond was yielding just 0.5% Monday, while
five-year German bonds yielded near zero, having dipped into
negative territory Friday.
Adding to Monday's tumult: German and French officials took a
hard line against Greece, reigniting fears--largely dormant over
the past two years--of a possible Greek exit from the euro.
That is a destabilizing prospect for the 19-member currency bloc
and its interconnected banks.
"The No. 1 catalyst for this selloff is this nervousness about
Greece," said James Swanson, a portfolio manager who oversees about
$2.6 billion in stock and bond investments for MFS Investment
Management.
Greeks will vote in national elections Jan. 25, and a leftist
party opposed to austerity measures imposed by the country's
international creditors leads in the polls.
Combined with worries about declining economic growth in other
parts of the world, the revival of political and economic concerns
in Europe underscored the risks confronting the $13.2 trillion
eurozone economy just as the U.S. is showing signs of robust
recovery.
The annual rate of inflation in Germany, Europe's largest
economy, was 0.1% in December, below economists' expectations and
the weakest rise since the height of the global financial crisis in
October 2009.
Economists estimated eurozone-wide figures, due for release
Wednesday, will show a 0.1% annual drop in consumer prices, which
would the first negative reading in more than five years and far
below the ECB's target of just under 2%. Last week, Spain's
statistics institute said consumer prices in the eurozone's
fourth-biggest economy fell 1.1% in December from the previous
year.
The German price data supported mounting expectations in
financial markets that the ECB will launch large purchases of
government bonds as soon as its next policy meeting on Jan. 22 to
avert a debilitating slide into deflation.
"Clearly, there's a high probability of negative inflation for
the eurozone," said ING Bank economist Carsten Brzeski in
Frankfurt. "It's increasing pressure on the ECB to act."
With their inflation mandate increasingly at risk, ECB officials
have fanned out in recent weeks, putting markets on notice that
they are ready to purchase government bonds, if needed, to raise
the money supply. They have also indicated that the first quarter
is the likeliest time for such a move to occur.
ECB President Mario Draghi said in a German newspaper interview
last week that, although the risk of persistent price declines is
limited, it can't be ruled out. "If inflation remains low for a
long time, people might expect prices to fall even further and
postpone their spending. We are not there yet. But we need to
tackle this risk," he said.
The concerns in Europe come as the price of oil has fallen by
more than half since June. Crude futures on the New York Mercantile
Exchange traded as low as $49.92 a barrel in intraday New York
trading Monday, the lowest since April 2009, before settling at
$50.04, down 5% on the day.
Though the decline in oil prices has led to lower gasoline
prices and boosted the fortunes of ordinary consumers, it has also
curbed profits for the once-booming energy sector, which has grown
in recent years to become a bigger part of the U.S. economy.
Shares of Caterpillar Inc. dropped 5.3% following a J.P. Morgan
downgrade that cited the company's exposure to energy, construction
and emerging markets, all of which are seen as slowing down.
Nicole Friedman and Dan Strumpf contributed to this article.
Write to Brian Blackstone at brian.blackstone@wsj.com, Tommy
Stubbington at tommy.stubbington@wsj.com and Min Zeng at
min.zeng@wsj.com
Access Investor Kit for Caterpillar, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US1491231015