Sensex down by 101 pts, auto stocks hammered against

The Bombay Stock Exchange benchmark Sensex on Tuesday recovered most of its early losses but still closed the day lower by over 100 points amid a plunge in global markets following a US panel officially acknowledging that the world's biggest economy is in recession.

After dropping hefty 325 points in early trade, which was attributed to heavy losses over night in the US markets, the BSE barometer regained losses to a great extent before settling the day down by 100.63 points at 8739.24.

Marketmen said trading sentiment has taken a severe jolt after it became official that the US, the world's largest economy is in recession.

A panel of economists of US National Bureau of Economic Research has noted that the nation entered into recession in December last year after 73 months of economic expansion since November 2001.

The committee's word is regarded as final on the question if America has entered into recession.

National Stock Exchange index Nifty also dropped 25.10 points at 2657.80.

Auto stocks were battered again with Tata Motors, Maruti Suzuki and Mahindra and Mahindra reporting sharp drops in sale in November.

The sector also suffered a blow as most of the world's leading auto companies showed concerns to falling sales.

Auto sector index closed the day lower by 3.04 per cent, the biggest loss among all sectoral indices today.

Bourses across the globe also tumbled with US's slipping into recession becoming official.

While the Mahindra & Mahindra was the biggest loser at 8.21 per cent, Maruti Suzuki, country's largest car maker, was the next biggest loser at 5.24 per cent.

Producer prices fall in eurozone

Eurozone producer prices fell 0.8% during October, raising hopes for an interest rate cut by the European Central Bank (ECB) on Thursday.

The bigger-than-expected drop was led by falling energy prices, which declined by 2%, the European Union's statistics office said.

Prices at factory gates are generally seen as an advance signal of inflationary trends in consumer prices.

The ECB is widely expected to cut its key rate to at least 2.75% from 3.25%.

'Retreating sharply'

"The message for the ECB is clearly: don't worry about inflation, cut now, and a lot," said Holger Schmieding at Bank of America.

The bank cut rates twice by 0.5 percentage points, in October and November, to try and boost the eurozone economy, which has entered recession after two quarters of negative economic growth.

The ECB has an informal target of keeping inflation in the eurozone below 2%.

Consumer prices rose at an annual rate of 2.1% in November, significantly slower than a 3.2% rise in October.

"The October producer price inflation add to the now substantial evidence that inflationary pressures in the eurozone are retreating sharply," said Howard Archer, chief European economist at IHS Global Insight.

Spain's woes

Meanwhile, Spain's jobless data released on Tuesday also suggested the eurozone economy may need a boost from the ECB.

The number of people registering as unemployed in Spain rose 171,000 to 2.99 million in November.

The Spanish unemployment rate went up for the eighth month in a row and, according to an EU estimate, stood at 12.8% in October, the highest level in the European Union.

According to the Spanish Labour Ministry, the number of people registering as unemployed in Spain has gone up by almost 900,000, or 43%, in the past 12 months.

JP Morgan axes 9,200 jobs at WaMu

JP Morgan Chase is to cut about 9,200 jobs at the former Washington Mutual (WaMu), the largest US bank to fail.

Regulators were forced to take control and sell off the mortgage lender at the end of September.

The cuts amount to more than a fifth of the workforce at WaMu. About 4,000 posts will go by the end of January.

JP Morgan bought most of WaMu's assets from regulators for $1.9bn (£1.3bn) as the bank became one of the biggest victims of the ongoing credit crunch.

JP Morgan spokesman Christine Hovelas said the remaining 5,200 jobs would be eliminated by the end of 2009.

She added that JP Morgan had not made a decision on what to do with WaMu's headquarters building in Seattle.

WaMu was JPMorgan's second big fire-sale acquisition since the start of the credit crunch. It also bought Bear Stearns in March.

The WaMu deal turned JP Morgan into the second-biggest US bank, with 5,410 branches in 23 states, of which it plans to close no more than 10%.

California 'faces budget crisis'

The governor of California, Arnold Schwarzenegger, has declared a fiscal emergency, amid fears the state could run out of cash by early next year.

He has ordered lawmakers to hold a special session to tackle the $11.2bn (£7.5bn) deficit in California, one of the world's biggest economies.

Across the US, state tax revenues are down because of the economic slump.

State governors are to meet President-elect Barack Obama later on Tuesday to press the case for federal help.

Governor Schwarzenegger on Monday invoked powers allowing him to declare a fiscal emergency as the new state legislature was sworn in.

"Without immediate action, our state is headed for a fiscal disaster," Mr Schwarzenegger said, saying that the current $11.2bn shortfall could swell to "a staggering $28bn" over the next 18 months.

"I compare the situation that we are in right now to finding an accident victim on the side of the road that is bleeding to death," the Republican governor told a news conference in Los Angeles.

"We wouldn't spend hours debating over which ambulance we should use, or which hospital we should use...No, we would first stop the bleeding, and that's exactly the same we have to do here."

He said the state was already drawing up plans to lay off public employees.

Spending cuts

Under the fiscal emergency, lawmakers have 45 days to pass legislation addressing the budget crisis. If they miss the deadline, 15 January, they have to stay in session without considering any other business until agreement is reached.

The previous state legislature failed to reach agreement on a series of spending cuts and tax increases.

However, the elections in November produced little change in the legislature's political make-up, with the Democrats three seats short of the two-thirds majority needed to pass fiscal measures.

"It's our job as legislators with working the governor to try to make a major dent in the problem, and we can only do so by cutting expenses and by raising addition revenue," the Senate president, Democrat Darrell Steinberg, told the BBC.

But Republicans indicated their continued opposition to both Mr Schwarzenegger's and the Democrats' proposals.

"This is not blind ideology on the part of Republicans, but our sincere belief that higher taxes will hurt the economy and lead to more uncontrolled spending," Republican minority leader Mike Villines said.

Governors from across the US are set to meet Mr Obama later on Tuesday in Philadelphia to discuss ways of tackling the budget shortfalls many states are experiencing.

"Without federal help...what we will have to do is just make continuing cuts and/or raise taxes, both of which would have further deleterious effect on our states' economy. We simply need help," Pennsylvania Governor Ed Rendell said.

But as he left for the National Governors' Association meeting in Philadelphia, Mr Schwarzenegger said he would not be asking for federal help until California's lawmakers addressed the budget crisis.

"The federal government shouldn't give us a penny until we straighten out our mess and we can live within our means," he said.

EU wants banks to boost lending

The EU competition commissioner Neelie Kroes has said she expects banks that receive state aid to give commitments to lend to the real economy.

At the EU finance ministers meeting in Brussels, she said national rescue schemes should also include incentives for the state aid to be returned.

The European Commission has been under pressure to approve various bail-out plans proposed by member states.

New rules regarding state aid are expected to be approved by Christmas.

The European Union competition commissioner made it clear that she wanted banks to lend more in return for government help.

"I would expect commitments to lend from banks benefitting from state aid," she told the finance ministers.

Ms Kroes said she did not want to prevent banks that receive public money from paying dividends.

"The individual situation of each bank should be taken into account," she said.

She also demanded that member states implement financial bail-out plans with caution, in order to avoid distorting the competition.

"We need to make sure that all the schemes broadly fit together and that their main effect will not be to advantage one national banking sector to the detriment of other member states," she said.

The finance ministers are expected to give their broad approval for the bail-out plans, and also to endorse the EU call for a 200bn euro stimulus package to boost growth.

Sterling steady after sharp fall

Sterling has struggled to remain steady against the US dollar after a massive fall on Monday - the largest in percentage terms since 1992.

The pound recovered to $1.484, as against its close of $1.483 on Monday.

On Monday it fell 5.2% against the dollar as yet more bad economic data pointed towards a prolonged recession and further interest rate cuts.

Sterling was also steady against the euro on Tuesday, at 1.176, compared to 1.174 euro on the previous day.

The pound's fall on Monday was the largest since the sterling crashed out of the Exchange Rate Mechanism (ERM) in 1992.

"The environment of very weak sentiment regarding the domestic economic picture and potential rate cuts alongside equity volatility is keeping sterling very much on the defensive," said Jeremy Stretch, strategist at Rabobank.

On Tuesday the pound also hit a 13-year low against the Japanese yen, at 137.14.

Sterling woes

Figures showed that house prices in Britain fell to their lowest level in three years, while manufacturing output was contracting at a record pace.

The poor economic data increases the likelihood that the Bank of England will cut interest rates sharply on Thursday.

Lower interest rates make it less attractive to hold sterling.

Also on Tuesday, the euro slid against the dollar on increasing expectations that the European Central Bank will also slash its interest rate this week.

Euro traded at $1.259 in early European trading, down from $1.267 in late New York trading on Monday.

In worrying economic times, the dollar tends to benefit as investors seek more secure assets, such as US Treasury bonds.

BA exploring merger with Qantas

British Airways has said that it is exploring a potential merger with the Australian flag-carrier Qantas Airways.

BA warned there was "no guarantee that any transaction will be forthcoming".

In a statement, BA said that the merger would be through the creation of a dual-listed company, so it would be listed in London and Australia.

It follows indications from the Australian government earlier in the day that it may be prepared to relax the rules on foreign ownership.

Under current Australian law, Qantas must be at least 51% Australian-owned.

Any individual foreign airline can only own up to 25% of it and only a total of 35% may be owned by foreign airlines.

Transport Minister Anthony Albanese proposed earlier on Tuesday that the rules be changed so that while 51% must still be Australian-owned, the remaining 49% may be owned by a single foreign airline.

Consolidation

The future of Qantas has been uncertain since an 11bn Australian dollar ($7.1bn; £4.8bn) bid for it from Airline Partners Australia (APA) collapsed last year due to lack of support from shareholders.

here is an EU investigation underway into a proposed revenue sharing deal between BA and American Airlines, which would allow them to agree fares, routes and schedules together.

BA also said that its discussions with the Spanish flag-carrier Iberia are also still continuing.

It is a time of consolidation in the airline sector, which was hit by the high fuel prices earlier in the year and is vulnerable to the economic downturn.

BA held a stake in Qantas for 11 years until 2004, when it sold its 18.25% shareholding to raise money to pay off some of its debt.

Falling profits

It its most recently announced results, BA reported a 91.6% drop in six-month profits, blaming "incredibly difficult trading conditions" for the plunge.

Its pre-tax profit totalled £52m between April and September, down from £616m a year earlier.

Qantas fared better in its results for the year to the end of June.

Its pre-tax profit rose 36% to 1.408bn Australian dollars.

But the airline warned at the time that the business was starting to see the effects of a slowing economy and rising fuel prices.