America's market sell-off on Thursday as well as its heart-stopping 1,000-point plunge sent world stock markets lower overnight, as expected. But there was not the type of panicked sell-off that struck the U.S. on Thursday. Friday morning saw a positive U.S. employment report, which investors hoped would settle the markets. However, in midmorning trading, both the Dow and the S&P were down sharply.
The biggest worry overnight centered on Japan, where the stock market quickly lost 4% of its value on both market fright and economic worries that the sharply rising yen would damage exports. But as trading wore on, Japan's Nikkei 225 average recovered a bit, closing only 3.1% lower. One positive factor was the Bank of Japan's decision to inject 2 trillion yen into money markets, which helped calm investors' fears. China's markets were also down, but by less. Hong Kong's Hang Seng index fell 1.1%, and China's Shanghai index was off 1.9%. Most other markets in the region were down, but by less than 2%.
The mood among investors is anxious. Greece's debt worries are much less controllable in investors' eyes, and the yield on Greek 10-year bonds continues to climb. Increasingly, traders believe a restructuring of Greek sovereign obligations is coming, which means any bond bought today is wrapped in high uncertainty.
Meanwhile, the markets in the U.S., just one day after the frightening plunge, have improving economic data to consider. The U.S. unemployment rate rose a bit to 9.9% from 9.7%, according to the Labor Department report released Friday morning. But job creation, the critical issue for most, was better than expected, showing 290,000 jobs gained in April, the largest improvement since March 2006.
The strong job growth suggests that the U.S. economy is getting better. After the employment report was released, for example, the dollar strengthened against the yen. However, investors remain in a dark mood, and stock indexes are reflecting global trouble.
Beyond the stock-market shock waves that went out yesterday as shares went into a free fall called a liquidity gap by some to describe the absence of buyers anxiety about the European economic crisis will continue to be high. As Carl Weinberg of High Frequency Economics noted in a Friday morning brief to clients, "The incremental news today is that investors, observing the E.U.'s inability to cobble together a graceful default for Greece, are wondering what will happen if, or when, other highly indebted European countries come under the gun."
U.S. stocks are down nearly 5.7% over the past three days of trading, volatility is rising, and the risk premium on securities is up as well. The new buzzword for the foreseeable future is not recovery but contagion.