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Wall Street slumps despite better than expected US service sector survey

Wall Street has slumped nearly 2% in early trading, but the US market is off its worst levels after a better than expected US service sector survey.

The Dow Jones Industrial Average is currently down around 220 points, having fallen nearly 300 points before the ISM non-manufacturing index for August came in at 53.3 rather than the expected 51. But with markets in a volatile state, investors were still wary since the positive survey could provide an excuse for the US Federal Reserve to delay any further quantitative easing, something traders have been betting would happen sooner rather than later. And in reality the survey does little to dispel the feeling the US economy is in deep trouble. Rob Carnell at ING Bank said:

Although this is a spot of welcome good news amongst the otherwise dismal backdrop, it probably doesn’t change the notion that the US is skirting recession right now.

The chaotic state of Europe’s finances continues to add to the uncertainty, with a confidence vote called in Italy over its supposed austerity budget as the country sees a general strike in protest against the cuts. Greece’s problems are also in investors’ minds, with analysts at RBS suggesting a default could come in December.

So European markets such as Germany’s Dax and France’s Cac are off around 0.7% while Italy’s FTSE MIB is 1.5% lower.

The FTSE 100 – having suffered £82bn of losses on Friday and Monday – has edged up 20.35 points to 5122.93 but the rally is fairly half hearted.

The Swiss National Bank’s decision to try and weaken the franc against the euro has added to the uncertainty, while

World Bank president Robert Zoellick did not help matters by warning that the European economy was entering a “particularly sensitive time”.

Zoellick, speaking on Bloomberg TV, said: “We are moving into a dangerous period.” He also warned that the drive to cut national deficits across Europe could sink the region’s economic recovery.

The volatily is unlikely to ease, with further key events this week. Wednesday sees a German court decision on whether the country was right to participate in the Greek bailout and the European financial rescue package. Analysts at RBS said:

While there is some speculation that the Court could actually declare the EFSF [rescue package] as against the law, we do not believe such outcome as likely at all. But we believe the Constitutional Court will lay out the conditions necessary for Germany to continue participating to the EFSF without breaching the Basic Law. More specifically, we expect the Court to state that a parliamentary vote will be required for Germany to participate in any future bailout.

Such a decision is likely to be seen very negatively by markets since it will add another layer of domestic politics in the crisis resolution mechanisms, raising the risk of massive coordination failure.

Thursday sees interest rate decisions from the Bank of England and ECB, with some analysts suggesting the latter should cut rates to try and instil some confidence in the beleagured Eurozone. The same day President Obama unveils his new jobs programmes, and a G7 meeting over the weekend will be widely watched to see if there is any co-ordinated action to deal with the current crisis. © Guardian News & Media Limited 2011 | Use of this content is subject to our Terms & Conditions | More Feeds