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Financial Markets Tumble Amid Fears of Slowdown, Higher Interest Rates

The sharp decline in world stock and commodity markets that began two weeks ago gained momentum Tuesday with sharp losses in Tokyo and New York, while gold, which had been at near record highs a month ago, was down by seven percent.

On Wall Street the Dow Jones Industrials lost another 90 points, closing down for the eighth straight session at below the 11,000 level. All of the gains in that index for the year have been erased. Gold, which had run up sharply during this year's commodity price boom, lost $44, or seven percent to under $600 an ounce. The precious metal has dropped 21 percent from its 26-year high set only a month ago.

So, why are markets jittery, volatile and declining? In short, say analysts, it is higher interest rates, which boost the cost of credit. Rates have been rising in Europe, Asia and the United States.

In the United States, where rates have been rising for two years, markets were surprised last week when the new head of the Federal Reserve signaled that there would be yet another rate increase at the end of the month. Most market participants had believed the central bank was nearly done tightening credit.

Anthony Cragg runs the Wells Capital Asia Pacific Fund that invests in Asian emerging markets. Speaking to Bloomberg News, he said investors should not be so cautious, especially when it comes to Asia. "I think investors worldwide at the moment are voting with their feet rather than with their brains. You know, there are some reasons to be cautious, and I think it is going to be a tough summer. We're seeing interest rates higher and slightly lower growth rates. But I think it is time to ask yourself some fairly basic questions: Is the Asia [growth] story intact? Is Asia for real? I would tend to answer yes to both of those," he said.

Emerging stock markets are down the most. On Tuesday equity prices in Colombia lost nine percent, Russia nine percent, Turkey six percent, India and Pakistan four percent.

But investors, who have enjoyed big run ups in many commodity and Asia equity markets this year, appear to be avoiding risk in any market. The Tokyo stock exchange was off four percent and most commodity prices, even oil and natural gas, have followed gold sharply down.

The world economy has been growing briskly. But the head of the International Monetary Fund said Tuesday that the global economy faces increasing downside risks. He mentioned rising oil prices, falling stock markets and trade imbalances.