Fear continues to drive down world markets

Stock markets slumped today after more grim economic news from the US stoked fears that the world’s largest economy is plunging into a deep and protracted recession.

The FTSE 100 index closed down 5.4%, Germany’s DAX was 4.9%, lower and the CAC-40 in France was down 5.9%.

In the US the Dow Jones index was down 2.8% and Japan’s Nikkei earlier had its worst day since 1987.

“Market sentiment is now being completely driven by fear,” one analyst said.

European stock markets had already been in retreat before Wall Street’s open following the Dow’s record fall yesterday and the Nikkei’s 11% tumble overnight.

The renewed selling over the last day or two means that the world’s stock markets are heading back towards the levels they were at the start of the week, before they breathed a sigh of relief on the unveiling of a series of bank rescue packages from governments around the world to restore confidence.

David Jones, chief markets strategist at IG Index, said today’s declines had to be kept in the context of where the markets were last Friday but warned that a rout could occur if the Dow slips below last week’s low of around 7,900 points.

“After that we have to get ready for the trap door,” he said.

Governments continued to weigh in with proposals to limit the crisis in financial markets.

The Swiss government became the latest to announce its plans to support its banking system with billions of dollars.

On Tuesday, the US government followed Europe’s lead and announced it is to pump some $250bn (€186bn) into shares of its leading banks as part of the $700bn (€521.5bn) package passed by Congress earlier this month.

The US plan was criticised overnight for being insufficient by Japanese Prime Minister Taro Aso and he blamed the renewed drop in markets on it.

The long-term key is whether the flurry of activity by governments can actually break the logjam in credit markets. Despite the co-ordinated interest rate reductions announced last week, and massive liquidity boosts, the rates at which banks lend remain abnormally high, despite some easing in rates and spreads this week.

Though the rescue packages have helped alleviate the pressures on the banking system, they will do nothing to prevent a serious economic slowdown. Federal Reserve chairman Ben Bernanke warned yesterday that patching up the credit markets will not provide an instantaneous jolt to the economy.

Concerns about the global economic outlook were clear also in the price of oil, which has fallen to $70.15, a new 14-month low.

Russian shares suffered another mauling due to growing concerns about plunging oil prices as well the banking sector.

In South Korea, the main index dropped 9.25 % after ratings agency Standard & Poor’s said it may downgrade the credit ratings of some of the country’s leading banks.

And Hong Kong’s key index trimmed losses closed down 4.8% after falling more than 8 % earlier. Australia’s main share index fell 6.7% while India’s was down 4%.

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