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Wall Street stocks plunge after figures show drop in US consumer confidence

FTSE rises in early London trading but European markets fall on eurozone worries

Shares in Wall Street plunged on Tuesday afternoon after figures showed that US consumer confidence had fallen to a two-year low.

The benchmark Dow Jones industrial average was down 71 points after the figures showed that consumers were more pessimistic than at any time since April 2009 as they grappled with rising inflation and uncertainty over jobs.

The Conference Board consumer research centre said that its confidence index plummeted to 44.5, down from a revised 59.2 in July. The number was the lowest level since April 2009 when the reading was 40.8. It is far below the 53.3 that analysts had expected. A reading above 90 indicates the economy is on solid footing; above 100 signals strong growth.

Traders took the news to mean that the US is still perilously close to slipping back into recession.

Although the FTSE 100 in London was up more than 100 points in the morning as it recovered after the August bank holiday, European bourses fell into negative territory on a similarly poor consumer confidence survey for the eurozone.

“August’s weak European business and consumer survey adds to the evidence that the eurozone economy is now stagnating at best,” said Jennifer McKeown, senior economist at Capital Economics.

Banking stocks led the way in London, with Royal Bank of Scotland, Lloyds Banking Group and Barclays up 12%, 8% and 8.4% respectively. The blue-chip index hit a high 5283 in early trading then fell back slightly.

Although Federal Reserve chairman Ben Bernanke did not announce more quantitative easing during his speech at Jackson Hole last week, markets had bounced back before this afternoon’s confidence numbers.

“Despite the initial disappointment of no QE3 announcement at Jackson Hole last week, markets took encouragement from Bernanke’s announcement that he would extend next month’s federal open market committee meeting to two days to fully explore and discuss any range of options for, and against, further stimulus,” said CMC analyst Michael Hewson.

“It seems that markets have taken this to mean that we could well see further stimulus, despite the significant barriers against it, both political and fiscal.”

News that Greek banks Alpha and EFG Eurobank were merging had helped European markets to recover early on. News of the Greek bank deal prompted the Greek equity market to rise 14%, its largest one-day rise in more than 20 years.

The deal creates Greece’s biggest bank, and was sealed with help from Qatar. Greek bank stocks shot up 29% in the wake of the announcement, prompting a rally in financial stocks around the world.

US consumer spending meanwhile rose at its fastest pace in five months in July, with strong demand for cars in particular.

Hewson said: “The market took in its stride IMF chief Christine Lagarde’s warning that European banks needed urgent recapitalisation, and that the crisis was entering a dangerous new phase. This call was firmly rebuffed by EU officials with EU commissioner Olli Rehn insisting that the health of EU banks had improved over the past year. To look at yesterday’s price action, markets seem to concur.” © Guardian News & Media Limited 2011 | Use of this content is subject to our Terms & Conditions | More Feeds