Panic sparks plunge in global markets
By Joanna Chung and Robert Orr in London and Andrew Wood in Hong Kong
Published: January 21 2008 19:12 | Last updated: January 22 2008 04:54
Global equities plunged on Monday as investor concerns over the economic outlook and financial market turbulence snowballed into a sweeping sell-off.
Tumbling Asian shares – which continued to fall early on Tuesday – led European stock markets into their biggest one-day fall since 9/11 as the prospect of a US recession and further fall-out from credit market turmoil prompted near panic among investors, who rushed to the safety of government bonds.
About $490bn was wiped off the market value of Europe’s FTSE Eurofirst 300 index and $148bn from the FTSE 100 index in London, which suffered its biggest points slide since it was formed in 1983. Germany’s Xetra Dax slumped 7.2 per cent to 6,790.19 and France’s CAC-40 fell 6.8 per cent to 4,744.45, its worst one-day percentage point fall since September 11 2001.
“September 11 aside, I can’t remember a day like this. It was carnage,” said Jimmy Yates, a dealer at CMC Markets in London. “It’s been a really good four or five years but it looks like the end of the bull run.”
US markets were closed for the Martin Luther King Jr Day holiday, but the futures market suggested the S&P 500 index would fall more than 4 per cent when it resumes trading on Tuesday.
Traders said that the prospect of a sudden decline in US stocks could prompt the Federal Reserve to cut interest rates before its scheduled meeting on January 30. The Fed said it did not comment on speculation.
“What we are seeing now has the hallmarks of both a financial shock and the beginning of a [US] recession, or at least of growth grinding to a halt,” said Credit Suisse’s fixed income strategy team in a research note.
Despite the dramatic falls, many believe there may be worse to come. “We believe the trough is not reached yet,” said Teun Draaisma, European equity strategist at Morgan Stanley.
Fears of fresh writedowns from financial institutions and downgrades of bond insurers – so-called monolines – are unnerving markets. The cost of insuring the debt of 125 investment-grade companies in the iTraxx Europe index leapt 10 per cent.
“The news that some monoline insurers have seen their ratings lowered, potentially with more to come, has opened up a very nasty scenario,” said Andrew Milligan, head of global strategy at Standard Life Investments. “Financials may very well face another hefty round of write-offs, which would reduce their future potential to extend credit to businesses, thus causing a vicious spiral to develop.”
On Friday, Ambac, the second-biggest bond insurer, lost its triple-A credit rating from Fitch Ratings, a move set to undermine the company’s ability to attract business and hit billions of dollars of securities it guarantees.
Michael Cox, of the Royal Bank of Scotland, said: “We now believe there are no public markets open to the monolines in their quest to raise capital...The only potential solution we can see that would enable triple-A ratings to be retained now is a co-ordinated bail-out by interested parties – banks and/or politicians.”
In Asia, Indian shares on Monday ended 7.4 per cent lower, and trading was halted in Mumbai after the market fell 9.8 per cent in the opening minutes; Hong Kong closed down 5.5 per cent; and Japan’s Nikkei average slid nearly 4 per cent, falling a further 4.4 per cent by midday on Tuesday while South Korea’s Kospi index lost a further 3.9 per cent. In the morning session on Tuesday, Hong Kong skidded another 8 per cent while Shanghai was down over 4 per cent. Indonesian shares sank 8 per cent in morning action.
“In the past few weeks, the froth had been knocked off the markets but we haven’t seen real pain – until today,,” said Ian Harnett, managing director of Absolute Strategy Research.
Additional reporting by Krishna Guha and Saskia Scholtes in New York, Jamil Anderlini in Beijing, Geoff Dyer in Shanghai and Lindsay Whipp in Tokyo |
