An outbreak of swine flu dampened tentative hopes for the global economy, sending markets lower on Monday and analysts fear a possible pandemic could force countries further into recession.

Asian stocks weakened with worries about a global flu pandemic unnerving financial markets after an outbreak of swine flu in North America hurt shares of airlines and transport companies while prompting some market players to trim risky positions, hitting currencies like the Australian dollar. European shares opened lower, while U.S. futures were also pointing to a sharply lower open.

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The virus, a new strain of swine flu, has killed 103 people in Mexico and spread to the United States.

The World Health Organization said the outbreak was a “public health emergency of international concern” that could become a pandemic, or global outbreak of serious disease.

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The World Bank estimated in 2008 that a flu pandemic could cost $3 trillion and result in a nearly 5 percent drop in world gross domestic product, damaging prospects of recovery in a world economy deep in financial crisis.

The SARS outbreak, which disrupted travel, trade and the workplace in 2003, cost the Asia Pacific region an estimated $40 billion.

It lasted six months and killed 775 of the 8,000 people it infected in 25 countries.

“A nasty chill will run through the market with swine flu as people think back to the SARS virus,” said Justin Urquhart Stewart, investment director at Seven Investment Management.

“The threat of the pandemic will add further weakness to global trade — we saw with SARS tangible percentage points knocked off the index and that was in a buoyant time. Put that in a weaker time and it is likely to be more unpleasant.”

Airline stocks were hit by fears the outbreak would hurt travel but drugmakers were higher on vaccine hopes against the virus.

Shares in Swiss drugmaker Roche Holding rose. The company said it was working on increasing production of Tamiflu, a drug shown to work against the new flu strain.

But a company spokeswoman said the production lead time for the drug from synthesis of the product to packaging was eight months.

“We’ve always made it clear that this cannot happen overnight which is why it is so important that countries are prepared before the pandemic breaks out,” she said.

‘Transitory’

Mexican Finance Minister Agustin Carstens tried to calm investors scared by the outbreak of flu, saying its impact on the economy will be “transitory.” The swine flu outbreak in Mexico came just when more world policymakers were proclaiming signs of a possible stabilization to the global economy.

“Six or eight weeks ago, there were no positive statistics to be found anywhere. The economy felt like it was falling vertically. Today, the picture is much more mixed. I think that sense of unremitting freefall that we had a month or two ago is not present today,” Lawrence Summers , economic adviser to U.S. President Barack Obama, said on Sunday.

The delicate state of the global economy was underlined by the Japanese government which cut its economic forecasts on Monday, saying gross domestic product would shrink 3.3 percent over the next year, and a senior ruling party official said further stimulus would be needed.

The Bank of Japan is expected keep interest rates near zero when it meets on Thursday but cut its economic forecasts and maintain a cautious view on the global outlook.

BOJ Governor Masaaki Sharakawa has signaled the BOJ’s monthly policy review will predict a gradual recovery towards the end of this year or early in 2010.

In Europe, two European Central Bank Governing Council members suggested further reductions in the main refinancing rate.

Council member and Bundesbank President Axel Weber said cutting the rate to 1% from 1.25% was necessary as economic growth would continue to lag its potential for some time.

“I think 1% is a sensible lower limit, because you can’t look just at the main refinancing rate. The deposit rate also plays a role,” Weber told the Frankfurter Allgemeine Zeitung in an interview.

ECB Governing Council member Nout Wellink said the ECB should discuss lowering rates below 1%.

Asked by Markets News International if the main refinancing rate should go below 1%, Wellink said: “This is part of a discussion we should have in the Governing Council. Of course that should be discussed.”

In a speech to the Economic Club in Washington D.C., Treasury Secretary Timothy Geithner said the U.S. bears a “substantial share” of the responsibility for the global financial crisis, and he believes the U.S. must recover first in order to return the rest of the world to growth.

Despite saying that the U.S. did have a substantial role to play in any global economic recovery, Geithner urged international cooperation on the crisis, saying that only by working together would every country recover fully from this crisis.

“We each face somewhat different challenges and thus are not all in the same boat,” Geithner. “But we are all in the same storm.”

Geithner spent most of the speech outlining what his department and the Obama Administration had done in the past four months — including the passage of the $787 billion economic stimulus package and the G-20 conference last month.

A globally coordinated action is needed, Geithner said, because no economy has been left untouched by this credit crisis. The Treasury Secretary cited a report by the International Monetary Fund forecasting that the global economy would contract for the first time in six decades, and only 17 out of 182 tracked economies are expected to grow faster in 2009 than they did in 2008.

“Never before in modern times has so much of the world been simultaneously hit by the confluence of economic and financial turmoil such as we are not living through,” he said.

Despite the need for global action, Geithner said that it was imperative that the U.S. economy help lead the global economy out of recession.

“The rest of the world needs the U.S. economy and financial system to recover in order for it to revive,” Geithner said. “We remain at the center of the global economic activity with financial and trade ties to every region of the globe.”

Despite pushing for the U.S. economy to recover first, Geithner said the U.S. should not focus its energy on reviving consumer spending — which currently makes up approximately 70% of the U.S. economy — and instead should focus on growth in “sustainable” sectors.

“We must ensure that our economies recover, growth will be on a firmer foundation, more stable and more sustainable,” he said.

President Obama was pretty clear on March 30th that Chrysler as we know it is finished.

“If they and their stakeholders are unable to reach such an agreement, and in the absence of any other viable partnership, we will not be able to justify investing additional tax dollar to keep Chrysler in business.”

That blunt message was directed at Chrysler, the United Auto Workers union, Chrysler’s prospective merger partner Fiat and Chrysler’s lenders to do a deal by April 30th or pull off the road.

John Wolkonowicz, an auto analyst at IHS Global Insight, suspects the Obama Administration is using intense pressure on all involved to keep Chrysler in business. Currently, Chrysler is 80.1%-owned by private-equity firm Cerberus Capital Management, and 19.9%-owned by Daimler AG.

“This is Chrysler fighting for its life.”

Enter the Italians.

Fiat and Chrysler are negotiating a deal that will give the Italian auto group a 20% stake in Chrysler, with the option to purchase more after Chrysler pays back its taxpayer-originated U.S. government loans — to date, $4 billion.

But why would Fiat want 20% of a U.S. auto maker that the President’s Auto Task Force concluded “is not viable as a standalone company?”

Wolkonowicz says Chrysler is quite attractive, even if some of its cars aren’t.

First, Fiat wants back into the U.S. market.  The company, which also makes Alfa Romeo, Lancia and Ferrari cars, currently captures about 9% of the European market and has a foothold in South America.  Fiat is the market leader in Brazil, where it fights for dominance against Volkswagen.

Second, in partnering with Chrysler, Fiat would be going into business with a company that will have less debt — and $6 billion more from the U.S. government if the negotiations under way now in Washington succeed.

Chrysler’s reorganization plan is pretty drastic: lay off 35,000 people (41% of the work force), cut capacity 1.3 million units and eliminate seven current nameplates.

In order to qualify for that $6 billion in additional government cash, Chrysler has to cut wages to make the company’s pay package competitive with U.S. transplant auto makers. It also has to renegotiate its retiree benefit plan with the UAW.  The Treasury wants the UAW to accept equity in Chrysler instead of cash the auto maker owes its VEBA (Voluntary Employee Beneficiary Association).

Similarly, Treasury wants Chrysler’s lenders to accept equity in exchange for eliminating $5 billion in Chrysler debt.

It’s a lot to push through by April 30, and Fiat CEO Sergio Marchionne says “absolutely we are prepared to walk. There is no doubt in my mind” if the negotiations with the UAW fail.  The U.S. government is prepared to walk, too, if Chrysler’s lenders don’t reduce the company’s outstanding debt.

“I think there is a 50-50 chance at this point that a deal will be done with Fiat,” Wolkonowicz said in an interview this morning while discussing the potential deal and hurdles to be crossed.

The Obama Administration says Chrysler needs Fiat because it will get access to Fiat’s small-car technology.

Wolkonowicz says that alone is worth billions of dollars but he is not sure Chrysler and Fiat — with the government looking over their shoulder — can pull it off, “the government doesn’t understand the auto industry.”

Still, Wolkonowicz says FIAT understands a sweet deal when it sees one.

If the Obama Administration gets what it wants — cutting Chrysler’s debt, legacy obligations and production costs — Fiat may soon be enjoying la dolce vita, American style.

Bank of America’s shares tumbled 15 percent, dragging world stocks down after it reported a big increase in troubled loans, even though its purchase of Merrill Lynch helped first-quarter profit more than double. nN20380236

The bank, which has received $45 billion from the U.S. government, said it had set aside $13.38 billion for credit losses, up from the fourth quarter’s $8.54 billion.

“We continue to face extremely difficult challenges, primarily from deteriorating credit quality driven by weakness in the economy and growing unemployment,” Chief Executive Kenneth Lewis said.

The Bundesbank, which said Germany’s recession had “intensified further” from a 2.1 percent contraction in the final three months of last year ID:nLK012202, did not counter a growing financial market view that late 2008 and early 2009 could mark the low point for the worst global downturn in 80 years.

That belief has propelled world stocks on a six-week rally, but most experts expect no real upturn until next year.

“If we are to see a sustained bout of buying, we need to see consistent positive economic newsflow, which simply can’t be guaranteed,” said Chris Hossain, senior sales manager at ODL Securities.

“Having endured 18 months of pain, it will take more than some OK banking numbers to get the masses to return to the markets.”

RUSSIAN JOBLESSNESS SOARS

Russian data showed about 1.8 million workers lost their jobs in the first quarter, taking the jobless rate to an eight-year high. ID:nLK123156

Retail sales, real wages and capital investment all fell more sharply than expected in March, suggesting Russia’s first economic contraction in a decade was not near an end.

Cautious optimism about corporate earnings and data suggesting the free-fall in global trade and economic activity was slowing has spurred talk of “green shoots” of recovery and buoyed world stocks by nearly a third since early March.

But the mood turned sour on Bank of America’s warning and Wall Street and European shares fell 3 percent and more. Asian stocks held near a six-month high struck last week. MKTS/GLOB

“People are starting to peel the results back and say ‘Wait a second,’” said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey. “Can (the results) continue in the next quarter?”

Oil slid more than 8 percent to around $46 a barrel, depressed by a rising U.S. dollar and caution about the pace of economic recovery and its effect on oil demand. O/L]

A survey released on Monday showed capital spending by U.S. firms improving, while the pace of lay-offs was slowing slightly. ID:nN17316389

U.S. economist Nouriel Roubini said the surge in global equity markets in recent weeks is a false rally because more financial shocks are in store and the U.S. economy is weak. ID:nHKG343541

“This is a bear market rally,” said Roubini, a professor at New York University and chairman of economic research firm RGE Monitor who had predicted much of the current crisis.

CAUTION

Policy-makers strove to temper optimism that the world economy has turned a corner.

Trillions of dollars committed to stimulus packages are starting to work, but governments may have to do more to revive the world economy, the head of the OECD said in Beijing.

Angel Gurria, secretary-general of the Organization for Economic Cooperation and Development, told Reuters the world economy would not bottom out until next year and would probably start growing again only toward the end of 2010. nPEK353179

European Central Bank chief Jean-Claude Trichet struck a similar note, saying it was dangerous to read too much into recent data that raised hopes the global economy may already have bottomed.

“With respect to 2009, let’s be prepared for having a very difficult year,” Trichet told Japanese newspaper Mainichi.

“In the course of the year, you have ups and downs: a mixture of better indicators and worse ones. Therefore, I would not overemphasize whatever we are observing.” ID:nLJ356909

The OECD’s Gurria said the jury was still out on whether stimulus measures adopted so far by Washington, Beijing and other governments around the world were sufficient.