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. Last Updated: 07/27/2016

World Stocks Slide On Brazil Worries




LONDON -- Major European bourses closed lower Thursday as an early rally ran out of steam after Wall Street plunged over 100 points on continued worries about Brazil's currency devaluation and its possible impact on the health and wealth of the global economy.


The Dow Jones industrial average, which fell 125 points Wednesday, was down 120 points or 1.3 percent by the close of European business as investors feared Brazil's financial problems would ripple through economies across the globe, including that of the United States.


"Even though growth is strong here, we're still seeing problems around the world. No one is out of the woods yet," one U.S. trader said.


The dollar was off its highs against the euro and the yen but was still well above Wednesday's levels when it fell 3.5 percent against the safe-haven Swiss franc and 2 percent against the new European currency.


"The markets are taking the Brazilian news so well it's almost uncanny," said Mitsuru Sahara, a manager at Sanwa Bank's treasury and trading department. "But for all that, of course there is a tremendous amount of anxiety about how the Dow and Bovespa [Brazil stock index] fare on day two."


Preliminary signs were not encouraging as Brazil's benchmark Bovespa index was down 178 points or 3.16 percent after gaining almost 4 percent in early trade.


"There's still some backlash after yesterday's devaluation," a trader at Banco Patente in S?o Paulo said. "This is the back-and-forth over whether it was enough, whether the currency will hold."


The Brazilian currency, the real, also lost ground against the dollar, weakening to 1.319 after firming in early trade. Brazil effectively devalued the real more than 8 percent Wednesday after vowing during months of financial-market crisis to defend its currency.


"Markets are still nervous, with lots of rumors flying around about more devaluation, bankrupt funds and more resignations," a trader at a S?o Paulo brokerage said. "It's mostly just rumors, but its shows how chaotic the market is." Government bond markets rose Thursday, led by U.S. Treasuries, moving inversely to equities while continuing to watch developments in Brazil. Earlier, rating agency Standard & Poor's cut Brazil's long-term debt ratings to reflect the shift in exchange-rate policy.


But analysts said trading was less choppy than Wednesday, when Brazil effectively devalued its currency and the country's central bank president resigned.


"Treasuries are doing well. There is a bit of flight to quality trading from Brazil, but nothing like yesterday," said Aongus Buckley, economist at GNI in London.


European governments, meanwhile, joined the United States on Thursday in backing Brazil's economic program, saying reforms under way rather than a new initiative from the Group of Seven leading industrial nations were what was needed to prevent a crisis.


G-7 ministers discussed the situation in Brazil by telephone Wednesday along with International Monetary Fund head Michel Camdessus, and top financial officials weighed in Thursday to try to play down the risks.


French Finance Minister Dominique Strauss-Kahn said economic problems that led to the effective devaluation of the Brazilian real on Wednesday were not comparable to the crises that swept through Asia and Russia last year.


"The situation in Brazil is not good. However, I do not think that we are facing something similar to that which we saw either in Asia or in Russia last August," he told a New Year's press reception.


"The reform of the Brazilian economy is under way," he said, adding that the entire international community agreed this must be continued.


In energy markets, crude oil lost early gains on the New York Mercantile Exchange and moved lower after the United States said it planned to propose that Iraq be allowed to sell as much oil as it wants to purchase food and medicine for its people, traders said.