Global stock markets reeled in Tuesday’s trading amid growing fears the European debt crisis threatens a return to recession and a spike in dangerous tensions between North and South Korea.
Investors, rocked by fresh turmoil in the Spanish banking sector, were also hit by the prospect of severe austerity measures in the eurozone that could slam the brakes on the fragile global economic recovery.
Reflecting the growing tensions, rates for money lent between commercial banks pushed higher, stoking worries there could be a repeat of the credit crunch of 2008 sparked by the collapse of US investment bank Lehman Brothers.
Investors meanwhile were buying safety, the dollar and US government bonds, in the hope of riding out a storm which has been building for months as first Greece and then other weaker eurozone states got into difficulty.
After heavy losses in Asia and Europe, US stock markets recovered from some of the damage inflicted early in the session.
The blue-chip Dow Jones Industrial Average recouped losses of over 250 points to finish just above the symbolic 10,000-point mark, but still in the red.
The Dow dropped 22.82 points (0.23 percent) to 10,043.75 while the broad-based S&P 500 staged a dramatic comeback, closing 0.38 points or 0.04 percent higher at 1,074.03.
Wall Street “again took its cues from overseas today, with the Korean peninsula and the eurozone sharing the global spotlight,” said Andrea Kramer of Schaeffers Investment Research.
“A valiant eleventh-hour blitz by the bulls kept the Dow Jones Industrial Average atop round-number support, and put the S&P 500 Index just north of breakeven.”
At one point all 30 of the Dow’s stocks had been down, with shares in consumer and financial firms hit hardest.
But amid the turmoil, news that US consumer confidence — a key component for any economic recovery — improved for the third straight month in May provided a boost.
Still, the US rally game too late to nudge up European markets.
“Investors continued to flee risky asset classes on Tuesday… causing European indices to slump,” said City Index analyst Joshua Raymond.
Michael Hewson, analyst at CMC Markets, said there were “increased fears about the stability of the European banking system and the financial viability of sovereign governments.
“Bank borrowing costs… have risen to their highest levels since July last year on concerns about the integrity of the European banking system,” he said, adding that markets were now worried about a double-dip recession.
In Europe, London’s benchmark FTSE 100 index of leading shares slumped 2.54 percent. In Paris, the CAC 40 fell 2.90 percent and in Frankfurt the DAX lost 2.34 percent.
Other European markets fared even worse, with Madrid down 3.05 percent and Milan losing 3.40 percent but these two markets were well off their early lows.
Meanwhile, the European single currency stood at 1.2351 dollars in late New York trade, coming off an early low of 1.2178 dollars in London trade.
In Asian trade earlier Tuesday, stocks were hit by reports that North Korea was on combat alert after it was blamed for the sinking of a South Korean ship in March.
Tokyo lost 3.06 percent, hitting its lowest level since November 30, Hong Kong dropped 3.47 percent and Shanghai shed 1.90 percent.
“The bloodbath continues on equity markets as a heightened sense of concern creeps back in to traders’ minds,” said ODL Securities analyst Owen Ireland.