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As the World Tracks Wall St., U.S. Leadership Is Two-Edged

By MARK LANDLER

FRANKFURT, July 24 As stock markets from Singapore to São Paulo join Wall Street in stomach-churning gyrations, investors overseas are asking an old question with new urgency: Can the world learn to live without American economic and market leadership?

So far, the answer seems to be no.

Even though Europe, Asia and Latin America are not suffering the corporate scandals or record-breaking bankruptcies that have rattled the United States, markets on all three continents have been moving in lock step with Wall Street.

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Today's trading was a stark illustration. Shares in Tokyo, Seoul, Hong Kong, Paris, Amsterdam and London all fell sharply in the wake of a bleak Tuesday in New York. In Europe, several exchanges closed at levels not seen since 1997, before an afternoon rally in New York gave United States markets their best day in weeks.

The fear shared by public officials, executives and ordinary investors is that further big losses could choke off fledgling economic recoveries in these countries. The United States, which has been the main engine of growth for the last decade, now looms as its biggest brake. "A slump in the U.S. would shatter global confidence," said Anais Faraj, European strategist at Nomura International in London. "Unfortunately, the odds of that happening are rising."

Already, there are signs that the erosion in investor confidence in the United States is hurting companies abroad. On Monday, Hugo Boss, the German fashion house, cut its profit forecast for the year by 16 percent, citing a weak American market, particularly for men's suits, which it said was sensitive to the markets and the economy. "Our business in the United States has declined noticeably in the last few weeks," the company's chairman, Bruno Sälzer, said. "Men have to be in a positive mood to buy high-end men's wear."

Shares of Hugo Boss have tumbled 21 percent since Monday, and the company faces a shareholder lawsuit in the United States accusing it of misleading investors.

This has been one of the bleakest weeks in memory on the Frankfurt stock exchange. Despite staging a late-afternoon reversal today after the rebound in New York, Germany's main index is trading near its lowest level in five years, dragged down by insurers nursing battered stock portfolios and banks, which are disclosing loans to WorldCom, the big long-distance carrier that filed for bankruptcy protection on Sunday.

Every day, it seems, brings more grim tidings from European companies. Siemens, the German engineering giant, said today that its fourth-quarter profit would be lower than the third. The company said orders for telecommunications and other equipment had fallen 20 percent.

"Investor confidence is completely damaged," said Hartmut Jende, a small investor in northern Germany who has seen much of his stock portfolio evaporate in the last few months. "The situation here is no different than in the U.S. market. There are no alternatives."

Executives say that as a proxy for the world's largest economy, Wall Street cannot help but cast a shadow over other markets. That pre-eminence, they said, has not been eroded by the accounting scandals.

"The die is cast in America," said Sir Martin Sorrell, chief executive of the WPP Group, the advertising firm. "The recession started there, and that is where the recovery will come from as well."

Though WPP is based in London, Sir Martin said it would follow American companies like Coca-Cola, reporting stock options as an expense in its next financial report.

By some yardsticks, economists say, Europe and Asia ought to be a refuge from the turmoil in the United States. Most European economies are in a slow recovery, which many think could accelerate later this year. In one sign of Europe's changing fortunes, the euro's value has risen in relation to the dollar, surpassing it for a few days last week.

Although companies like Deutsche Telekom and Vivendi Universal have suffered big declines in share prices prompting the dismissal of their chief executives, Ron Sommer and Jean-Marie Messier there have been relatively few disclosures of corporate impropriety.

Indeed, some experts said that the ousters of Mr. Sommer and Mr. Messier presage a new era of responsiveness to shareholders. "You can't prevent the rise of an equity culture in Europe," Mr. Faraj said. "These governments are committed to privatizing their state companies."

Asia has different concerns. Because its economies depend heavily on exports to the United States, investors there are sensitive to any erosion in confidence in America. At the same time, countries like Thailand and South Korea have been able to rekindle demand for their goods among their own consumers. Having survived the financial crisis of 1997-98, many Asian countries are enjoying a rebound.

"Our fundamentals are much better," said Ajay Kapur, an East Asian strategist at Salomon Smith Barney in Hong Kong. "The U.S. is going through an asset deflation that Asia went through five or six years ago."

South Korea expects its economy to grow 6 percent this year, on the strength of exports and domestic demand. Five years after it ran out of foreign exchange reserves, Seoul has $115 billion in reserves.

Until the latest turbulence, its market was a star performer, more than doubling from September to April. Today, it fell nearly 3 percent, standing 23 percent below its spring peak. "People saw the fundamentals in Korea as stronger than in the United States," said Ha Sa Jun, an executive at Woori Financial Holdings in Seoul. "Korea is stronger now than during the economic crisis."

Asia is showing other signs of financial independence. This week, China offered shares in the Hong Kong unit of one of its largest banks, the Bank of China, raising $2.5 billion to $2.8 billion. Unlike previous stock offerings of Chinese state companies, which were sold aggressively to American investors, these shares were largely bought by investors from Japan and Hong Kong.

Few countries have had more experience with a burst bubble economy than Japan. And yet, Japanese investors have poured money into the United States since the beginning of the year, in part because the strengthening of the yen makes American stocks relatively cheap.

Despite the recent scandals, analysts say Japanese investors regard American stocks, and assets denominated in dollars, as the safest in the world. Some note that the problems at Enron and WorldCom seem less pervasive than the cronyism that helped drag down Asian economies.

"In the U.S., the problems have been generated by individual companies," said Atsushi Ishii, deputy general manager of the global investment department at Tokio Marine and Fire Insurance, who expects Wall Street to recover later this year. "The financial condition of the market over all is still strong," he said.

Investors in Latin America are also hoping for a United States recovery. The benchmark stock index in São Paulo has fallen in recent weeks to its lowest levels since 1999, largely in response to Wall Street.

Dany Rappaport, an analyst at Tendências, a consulting firm in São Paulo, said Latin American countries were particularly vulnerable to market turmoil in the United States because they run big current-account deficits. "They need a steady influx of foreign capital to keep their accounts balanced," he said.

At times like these, economists and analysts agree, breaking the psychological link between global markets would be desirable. The word on the lips of brokers in Europe and Asia is "decoupling."

But doing that is difficult, even for prosperous economies like those of Western Europe. For the Europeans to buck the jittery mood emanating from the United States, economists say they would have to generate strong consumer demand in their own countries.

"The U.S. has been carrying the global economy for far too long," Mr. Faraj said. "Even Atlas needs to take a break."

The trouble is that Europe's economy, while growing, remains sluggish. Retail sales in Germany have dropped, while consumer confidence in Italy and France is tenuous. Critics say that European governments have shied away from steps, like liberalizing labor markets and lowering taxes, that would bolster corporate investment and consumer spending.

Given the connectedness of the global economy, some think that even if Europeans took these difficult steps, they would still not be able to deflect the ill winds from Wall Street.

"How can you decouple the European markets from the United States?" said Max Dietszch-Doertenbach, an investment banker in Frankfurt. "So many of these companies are commingled. So many of these companies are active in the same markets."