European, Asian Markets Whomped

Updated from 7:50 a.m EST

Stock markets around the world convulsed Monday on concerns the U.S. economy is headed for a recession that could spread overseas.

U.S. markets were closed Monday in observance of Martin Luther King Day, but bourses elsewhere saw sharp declines. London's FTSE-100 lost 5.5%, closing at 5,578.20. It was the British benchmark's worst one-day decline since Sept. 11, 2001. Elsewhere, Germany's DAX 30 slumped 7.2%, and France's CAC-40 index plummeted 6.8%.

European markets took their cues from Asian exchanges, which earlier had hemorrhaged into the red.

India's main index lost 7.4% Monday, after seeing an intraday decline of as much as 10%. It ended the session down 1408.

Heavy selling throughout Asia was triggered by indices in China and Hong Kong tumbling through key technical support levels. Fears abounded that the $145 economic stimulus plan backed by the Bush administration won't be enough to stave off a recession.

In China, the Shanghai Composite Index dived 266 points, or 5.1%, to 4914, while the Hang Seng plummeted 1383 points, or 5.5%, to 23,818, falling through the key 24,200 level and ending only 400 points away from the 23,400 benchmark that many agree puts the index officially in a bear market.

In Japan, the Nikkei slid 535 points, or 3.9%, to 13,325 points. The yen rose to 106.08 vs. the dollar, its strongest level in four months, after investors unwound carry trade positions.

"It's a mixture of reasons, I won't say this is only a short-term correction," says Jayesh Shroff, who manages $6 billion for SBI Mutual Fund in Mumbai. However, Shroff also points out that heavy buying and selling cycles have come in short-term ranges over the last year in India, so he says the market may languish now for some time, rather than sell off further.

Financials were sharply lower, as ICICI Bank(IBN Quote - Cramer on IBN - Stock Picks) shed 5.8%, to 1245 rupees, and HDFC Bank(HBD Quote - Cramer on HBD - Stock Picks) followed, down 4.3%, to 1575 rupees. Tech shares also lost, with Infosys(INFY Quote - Cramer on INFY - Stock Picks) off 5%, at 1390 rupees, and Wipro(WIT Quote - Cramer on WIT - Stock Picks) 1.1% lower, at 455 rupees.

The big blue-chips were the worst hit in Hong Kong. Shares of CNOOC(CEO Quote - Cramer on CEO - Stock Picks), PetroChina(PTR Quote - Cramer on PTR - Stock Picks) and China Shenhua Energy(CUAEF Quote - Cramer on CUAEF - Stock Picks) experienced deep short-selling and Asian hedge funds unloaded big positions.

CNOOC slipped 6.4%, to HK$11.06, while PetroChina tumbled 8.4%, to HK$11.30 in Hong Kong, and 5.5%, to 27.48 yuan in Shanghai. China Shenhua Energy was 3% lower, at HK$42.

Among financials, China Life Insurance(LFC Quote - Cramer on LFC - Stock Picks) plunged 9.5%, to HK$32.85, while rival Ping An(PIAIF Quote - Cramer on PIAIF - Stock Picks)dipped 6.3%, to HK$68.05. Hong Kong Exchanges(HKXCF Quote - Cramer on HKXCF - Stock Picks) dropped 5.9%, to HK$173.40.

Telecoms were also some of the big decliners of the day. China Netcom(CN Quote - Cramer on CN - Stock Picks) fared worst, shedding 8.8%, to HK$23.45, while China Telecom(CHA Quote - Cramer on CHA - Stock Picks) lost 7.8%, to HK$6.04, and China Unicom(CHU Quote - Cramer on CHU - Stock Picks) fell 7.2%, to HK$16.52. China Mobile(CHL Quote - Cramer on CHL - Stock Picks), the Hang Seng's biggest single stock weighting, dived 4.3%, to HK$117.70.

Many in Asia are now debating whether the selloff is a longer-term correction, or whether markets are headed for a rebound soon. A report issued by Citigroup in Hong Kong Monday pointed out that the worst of selling activity may not yet have materialized, since total selling to date is $3.4 billion vs. $4.9 billion in the market correction in June 2006, and $4.5 billion in March last year. The report also said that outflows may reach $8 billion before markets rebound.

Market participants also expect the big selloff to impact mainland companies listed in New York Tuesday, known as Chinese "N" shares. Last week, when the Hang Seng shed 6.2%, Baidu.com (BIDU Quote - Cramer on BIDU - Stock Picks) lost 20% of its value, to $273, while rival Sohu.com (SOHU Quote - Cramer on SOHU - Stock Picks) fell 18%, to $42.05.

"The scenario for a massive selloff to 20,000 [for the Hang Seng] is building, and a 75-basis point rate cut will count for nothing -- the die is cast," says Andrew Clarke, a trader for SG Securities in Hong Kong.

A U.S. recession would hurt Japanese exporters of electronic goods, because U.S. consumers would likely pull back on purchases of leisure goods. In Japan, Sony(SNE Quote - Cramer on SNE - Stock Picks) fell 2.1%, to 5490 yen, while Canon(CAJ Quote - Cramer on CAJ - Stock Picks) shed 1.6%, to 4440 yen, and Nintendo(NTDOY Quote - Cramer on NTDOY - Stock Picks) dived 3.8%, to 52,900 yen. Dealers noted, however, that several large funds have been accumulating shares in Nintendo over the past week, as the stock has consistently flailed.

Big Japanese banks also fell. Mitsubishi UFJ(MTU Quote - Cramer on MTU - Stock Picks) lost 6.2%, to 915 yen, and Sumitomo Mitsui Financial(SMFJY Quote - Cramer on SMFJY - Stock Picks) eased 1.4%, to 579 yen.

Markets in Taiwan and South Korea were also lower. The Taiex gave back 74 points, or 0.9%, to 8110, while Kospi fell 51 points, or 2.95%, to 1683.