Swine flu could stall economy's 'nascent recovery'

World stock markets fell today but relatively strong U.S. consumer confidence and housing data helped limit swine flu-related losses. The FTSE 100 of leading British shares closed down 70.61 points, or 1.7 percent, at 4,096.40 while Germany's DAX fell 86.65 points, or 1.9 percent, to 4,607.42. The CAC-40 in France was down 51.41 points, or 1.7 percent, at 3,051.02. On Wall Street, the Dow Jones industrial average was down 16.57 points, or 0.2 percent, at 8,008.43 at midday while the broader Standard & Poor's 500 index was down 2.13 points, or 0.3 percent, at 855.38. “You’ll see a pretty severe impact on travel industry stocks on the short term,” said Paul Larson, equity analyst at the Chicago-based fund tracker Morningstar Inc. “But how long that lasts is unknown. Right now it’s another headwind that the economy has to face.” However, if the disease becomes a pandemic, it could have a more significant impact on the markets. “If it ends up being a severe illness here where people are afraid to leave their homes, that could exacerbate the recession,” Mr. Larson said. “It could crush any nascent recovery that we are experiencing today.” The solid performance on Wall Street was unexpected — futures markets were predicting declines at the open — and came after the Conference Board said consumer confidence in the world's largest economy soared in April and a housing survey from S&P/Case-Shiller indicated that house prices were no longer falling off a cliff during February. David Jones, chief market strategist at IG Index, said the U.S. data helped stem the selling tide, which started in Asia earlier as investors worried that the deadly swine flu outbreak in Mexico was going global and putting a further strain on already-diminished trade and travel. The markets remain on guard for any developments surrounding the swine flu outbreak in Mexico. Governments have toughened their precautions and the World Health Organization has raised its alert level from three to four — just two steps short of it declaring a full pandemic — and said it was now too late to contain the virus. "Markets remain jittery and with the current flu outbreak set to worsen, it is going to be developments here that will result in shares being kept under pressure," said IG Index's Jones. Earlier, investors around the world ran for cover, abandoning riskier assets such as stocks and diving back into safe haven assets like the dollar and the yen, amid mounting concerns that, as in the SARS outbreak in 2003, affected areas and global trade could suffer as countries restrict bans of one sort or another. "Exposed industries such as airlines and hotel operators have borne the brunt of the equity sell-off, but if fears escalate into wider global growth concerns, broad-based declines in global indices are possible," said Geoffrey Yu, an analyst at UBS. For the second day running, airlines and travel-related companies felt the brunt of the selling pressure. In Europe, Air France-KLM fell another 3 percent while British Airways PLC slumped a further 5 percent. Aer Lingus fell by up to 20 percent at one stage after issuing a profit warning. And in a repeat of Monday, pharmaceutical stocks, particularly those with high-profile anti-flu vaccines — Switzerland's Roche Holding AG and GlaxoSmithkline PLC — benefited amid the pandemic fears. A potential pandemic wasn't the only distraction for investors, already uneasy about the results of the U.S. government's stress tests to gauge the health of the largest 19 banks. The reports are set for release Monday, though Bank of America Corp. and Citigroup Inc. have been told by regulators the two will likely need to raise more capital, according to a Wall Street Journal report. The report suggested that Bank of America's capital shortfall could run into billions of dollars, which, in the current environment would likely be extremely difficult to raise through the private sector. "It is still hardly the environment for fund raising, and after the strong rallies seen by banks over the past month, it is not surprising that investors saw this as a good reason to hit the sell button and sit on the sidelines," said IG Index's Jones. Later today, the U.S. Federal Reserve will begin its two-day meeting on interest rates. The Fed has already lowered its target rate to a range of zero to 0.25 percent and started buying Treasurys in an effort to keep market rates low. Investors are curious about the central bank's assessment of the economy, and whether it will accelerate its purchases of government bonds. Earlier, Asia's markets took a pummeling with Japan's Nikkei index closing down 232.57 points, or 2.7 percent, to 8,493.77 and Hong Kong's Hang Seng ended 285.31 points, or 1.9 percent, lower at 14,555.11. Elsewhere in Asia, South Korea's Kospi retreated 3 percent to 1,300.24. Shanghai's main index was down 0.2 percent, Taiwan's stock measure dropped 1.9 percent while Australia's benchmark was down 0.6 percent. Oil prices also fell foul of the swine flu concerns as investors worried about lower demand, with the June contract on the New York Mercantile Exchange down 97 cents at $49.17 a barrel. The euro recovered slightly to trade at $1.3050, having fallen below $1.30 earlier when stocks were falling and the dollar was benefiting from its safe haven status. Additional reporting by Sue Asci.