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Originally published Wednesday, June 22, 2011 at 4:06 AM

Global stocks hit by Fed's US economy warning

A downbeat assessment of the U.S. economy from the Federal Reserve hit global stocks Thursday, while the euro faltered ahead of a meeting of EU leaders where Greece's debt troubles are likely to dominate talks.

AP Business Writer

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A downbeat assessment of the U.S. economy from the Federal Reserve hit global stocks Thursday, while the euro faltered ahead of a meeting of EU leaders where Greece's debt troubles are likely to dominate talks.

Market sentiment, which is fragile ahead of next Tuesday's crucial parliamentary vote in Greece on more austerity cuts, was knocked by a warning from Fed chief Ben Bernanke that the problems plaguing the U.S. economy "may be stronger and more persistent" than originally thought.

However, with inflation at relatively high levels, Bernanke gave no indications that the central bank is likely to provide more monetary stimulus after the current $600 billion program runs out at the end of the month.

"Last night's sobering words from Bernanke confirmed the fears of many in the market - the economic recovery remains fragile and there's no further stimulus package coming along for the time being," said Yusuf Heusen, senior sales trader at IG Index.

Bernanke's comments, delivered after the Fed kept its benchmark interest rate unchanged at near zero percent, hit share prices on Wall Street, with losses carrying through into the Asian and European sessions.

In Europe, the FTSE 100 index of leading British shares was down 0.9 percent at 5,720 while Germany's DAX fell 1.2 percent to 7,193. The CAC-40 in France was 1.2 percent lower at 3,823.

Wall Street was poised for modest declines at the open - Dow futures were down 0.4 percent at 11,981 while Standard & Poor's 500 futures fell 0.5 percent to 1,274.

European stocks have underperformed after figures indicated that the recovery in the eurozone was running out of steam.

The monthly composite purchasing managers index from financial information company Markit fell to 53.6 in June from 55.8. The index, a broad gauge of economic activity, is now at its lowest level since October 2009 after three straight falls.

"The current uncertainty about the outcome of the Greek sovereign debt crisis, with daily advances and setbacks, is damaging to the economy," said Marie Diron, senior economic adviser at Ernst & Young. "Financial markets remain under intense pressure as they face the possibility of very large losses should a disorderly default happen."

Investors all round the world will be keeping a close watch on developments in Brussels, where leaders from the 27 EU countries are gathering for a regular summit.

Greece's debt crisis is likely to be one of the main discussion points ahead of next Tuesday's Parliamentary vote in Athens. If lawmakers in Athens pass a further euro28 billion ($40.24 billion) in budget cuts and new taxes and back a euro50 billion privatization program, then the eurozone countries will hand over euro12 billion ($17 billion) in bailout funds that Greece needs to avoid bankruptcy in mid-July.

"The EU summit is also going to keep investors alert in case there is any definitive line made on Greece, the next tranche of loans or what a second bailout may look like," said Joshua Raymond at City Index.

The Greek backdrop continued to keep traders in the currency markets on edge, with the euro down 0.5 percent at $1.4247.

Earlier in Asia, Japan's Nikkei 225 closed 0.3 percent lower at 9,596.74, while Hong Kong's Hang Seng lost 0.5 percent to 21,759.14.

Chinese shares bucked the trend, with the Shanghai Composite Index up 1.5 percent to 2,688.25 and the Shenzhen Composite Index gaining 2.1 percent to 1,111.18. Shares in cement, glass and furniture rallied due to government plans for massive construction of public housing.

In the oil markets, prices fell alongside stocks. Benchmark oil for August delivery was down $1.86 to $93.55 a barrel in electronic trading on the New York Mercantile Exchange. The contract gained $1.24 to settle at $95.41 on Wednesday.


Pamela Sampson in Bangkok contributed to this report.

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