China policy fears, US bank earns weigh on markets

A disappointing batch of U.S. bank earnings and fears of further lending curbs in China weighed on world stock markets Wednesday, while concerns about Greece's debt problems sent the euro sliding to a five-month low against the dollar.

In Europe, the FTSE 100 index of leading British shares was down 55.15 points, or 1 percent, at 5,457.99 while Germany's DAX fell 58.46 points, or 1 percent, at 5,918.02. The CAC-40 was down 38.12 points, or 1 percent, at 3,971.55.

Wall Street was also expected to open lower after solid gains in the previous session _ Dow futures were down 57 points, or 0.5 percent, at 10,613 while the broader Standard & Poor's 500 futures fell 7.2 points, 0.6 percent, at 1,138.50.

Investor sentiment, already fairly downbeat after China's main index dived nearly 3 percent on fears of more monetary tightening in the country, has been dented further by a downbeat batch of U.S. bank earnings.

Morgan Stanley, Bank of America, Bank of New York Mellon all reported lower than expected earnings for the fourth quarter. Their failure to meet analysts' expectations reinforced fears that the economic recovery will not be as strong as current stock market valuations suggest following a ten month bull run.

Stocks have been on the retreat all day, largely because of mounting speculation that some of China's banks have been pressured to refrain from any further loans for the rest of the month. That raised fears that China's growth, which has been crucial for the global economy over the last year, may slow sharply if the monetary authorities tighten policy.

Beijing has already begun to take steps to rein in stimulus-fueled liquidity, raising reserve requirements for banks and increasing the rate paid on treasury bills.

On Thursday, China will be the world's first major economy to release fourth quarter gross domestic product figures. Analysts expect economic growth to have remained robust at over 10 percent on an annual basis, and that would underline need for some monetary tightening.

"A teeny-weeny bit of tightening against such a growth backdrop does make sense," said Kit Juckes, chief economist at ECU Group.

Even so, China's main Shanghai Composite Index dived 95.02 points, or 2.9 percent, to 3,151.85.

Elsewhere in Asia, Hong Kong's Hang Seng index fell 391.81 points, or 1.8 percent, to 21,286.17 while Japan's Nikkei 225 stock average lost 27.38 points, or 0.3 percent, to 10,737.52. Once again, Japan Airlines was in focus, slumping 60 percent to 2 yen after filing for one of the country's largest bankruptcies on Tuesday. JAL shares will be removed from the stock exchange on Feb. 20.

Singapore's market was off 0.7 percent, Taiwan retreated 0.3 percent and Thailand's stock measure lost 0.8 percent.

South Korea's Kospi shrugged off the regional fall, advancing 0.2 percent and Australia's stock measure crept higher by 0.1 percent.

Oil prices fell as fears in the market grew that Chinese demand would be weakened if lending policies are tightened.

Benchmark crude for February delivery slid $1.24 to $77.78 in electronic trading on the New York Mercantile Exchange. The contract rose $1.02 to settle at $79.02 on Tuesday.

The dollar was flat around 91 yen while the euro slid to $1.4137 _ just above its earlier five-month low of $1.4132 _ amid ongoing concerns about Greece's public debt situation.

"While there has been no new news with respect to the Greece budget situation this morning, the uncertainty about the damage this could do to monetary union is ensuring the euro remains under pressure," said Jane Foley, research director at Forex.com.

Currency markets will be particularly interested to see if the bout of euro selling turns into a rout, especially as the currency has dropped below its 200-day moving average of $1.4297 _ widely considered a key support level.

Neil Mackinnon, global macro strategist at VTB Capital, noted that since its inception in 1999 the euro has dropped sharply on every occasion it has fallen below its 200-day moving average against the dollar.