China, Europe put markets on edge

LONDON: Stocks got some much-needed support Thursday from unexpectedly high earnings at US banking giant Goldman Sachs despite market jitters over China's economy and huge national debts in Europe.

Investors are worried that the Chinese economy, which is now the key driver for global growth as Europe and the United States are only slowly emerging from the world economic crisis, may be beginning to overheat.

China's economy expanded by 8.7 percent in 2009, new data out on Thursday showed, while the business consultancy PricewaterhouseCoopers (PWC) forecast that China could overtake the US as the world's top economy by 2020.

But China's biggest rise in inflation in 13 months underlined the broader challenges of breakneck growth, and came as the World Bank and International Monetary Fund warned again that the country could face an economic bubble.

"China gets a touch of overheat -- markets across the rest of the world shudder! That is the way of things today in a global economy controlled as much in the East as it is in the West," said analyst Howard Wheeldon at BGC Brokers.

The concern over China is playing out against a backdrop of investor nerves over the global economy, with the IMF and the United Nations this week both warning of a possible "double-dip recession" this year.

Those worries have been heightened in Europe, where several governments are struggling to cope with rising debt levels. Debt troubles in countries like Greece and Portugal have also dragged down the euro against the dollar.

Capital Economics, an economic consultancy, said that "there are still major uncertainties over the likely strength and sustainability of the upturn."

"Meanwhile, those euro-zone economies with a combination of fiscal strains and competitiveness problems face a painful period of adjustment."

There was some good news for the stock markets, however, from the United States where Wall Street juggernaut Goldman Sachs on Thursday reported impressive fourth-quarter and full-year profit despite the downturn.

"European equities are getting a lift from the Goldman Sachs results this afternoon," said David Morrison, an analyst at financial spread-betting firm GFT, adding: "Profits were very strong and well above the consensus estimate."

But he warned: "Gains may be tempered however until after investors have heard what the president has to say about investment bank regulation today," referring to a planned announcement by US President Barack Obama.

Wall Street stocks suffered their biggest drop for the year on Wednesday following news that China was planning to rein in credit after explosive growth last year. In Europe, bourses in Paris and Frankfurt lost 2.0 percent in value.

European markets were sluggish on Thursday but avoided the sharp falls of the previous day.

London's benchmark FTSE 100 inched down 0.09 percent in afternoon trading, Frankfurt's DAX gained 0.37 percent and the CAC 40 in Paris fell 0.67 percent.

The Tokyo Stock Exchange's benchmark Nikkei-225 index closed up 1.22 percent on Thursday, shrugging off the negative lead from Wall Street as foreign investors bought heavyweight companies such as Toyota and Sony.

"Faster-than-expected Chinese growth has heightened fears that the People's Bank of China may hike interest rates this quarter," said analyst Jane Foley at online trading site

"This may not yet be a consensus view but the rise in tightening fears was sufficient to push most Asian stock indices lower, which led to a flurry of dollar buying."

The euro fell amid worries about China and the fiscal crises in Europe.

The euro was changing hands at 1.4093 dollars in afternoon trading in London, compared to 1.4103 late in New York on Wednesday. The euro had hit a five-month low against the dollar on Wednesday.

The IMF warned Portugal on Wednesday of the "critical" importance of getting its public finances amid existing concerns over Greece's own massive debt troubles.

"As soon as markets had digested the situation in Greece it's now Portugal's turn," said Commerzbank analyst Antje Praefcke, adding that the IMF report put "additional pressure" on the euro.