World markets hope for recovery

Financial markets around the world will today hope for a brighter outlook after a turbulent start to the week.

The latest shockwaves in the credit crisis engulfing the global financial system wiped £51 billion from the value of the UK’s biggest companies yesterday.

On a dramatic day which saw the Bank of England pump an extra £5 billion into frozen money markets, London’s FTSE 100 Index tumbled 3.9%, or 217.3 points, to close at 5414.4 – its lowest level for more than two years.

The sell-off was sparked by the rescue and cut-price sale of ailing US investment bank Bear Stearns on Sunday.

Worldwide markets recorded heavy losses following the emergency bail-out.

But the Dow Jones industrials in the US recovered towards the end of trading yesterday to finish up about 21 points, despite being down 200 points in early trading.

US President George Bush intervened to help quell early Wall Street panic with praise for the US Federal Reserve’s “strong, decisive action” over the crisis, which has drawn parallels with mortgage lender Northern Rock’s woes.

In a rare Sunday move, the US Federal Reserve cut the rate at which it lends to other banks by 0.25% to 3.25% and set up a new lending facility to give investment banks short-term cash if needed.

The Fed is set to cut interest rates again – possibly by as much as 1% – at its latest meeting today to spur on the world’s largest economy.

Prime Minister Gordon Brown also moved to assure markets, saying in Parliament that Britain will continue to take “whatever action is necessary” to maintain economic stability.

The Bank of England’s £5 billion funding injection aimed to ease a sudden freeze in overnight lending between banks following Bear Stearns’ troubles.

It was the first such emergency operation since the start of the credit crunch six months ago, but cash-strapped banks were calling for almost five times as much funding leading to fears that the move would not be enough.

In London, a raft of major banks were among the Footsie’s biggest fallers, with Barclays off 9%, Halifax Bank of Scotland down 13% and Royal Bank of Scotland 9% lower.

The credit crunch has now seen the value of the UK’s top 100 companies fall by nearly 20% since the Footsie reached seven-year highs above 6,700 in June last year.

And the UK’s biggest defined benefit pension schemes saw £8 billion wiped off their value yesterday.

The 200 biggest schemes, which include final salary pensions, saw their funding levels plummet from a collective surplus of £15 billion at the end of Friday to a £7 billion surplus at the FTSE’s close, according to Aon Consulting.

Bear Stearns became the biggest victim of the crunch yet after being forced to seek emergency funding on Friday. It was bought by rival JP Morgan Chase for a cut-price £236.2 million US dollars (£116.4 million) on Sunday.

Oil prices spiked at a new record near 112 US dollars a barrel as fears over the US economy grew.

The dollar sank to a record low against the euro and hit a 12-year low against the Japanese yen, while gold prices rose to another record high.

Mr Bush said: “One thing is for certain – we’re in challenging times. But another thing is for certain – that we’ve taken strong and decisive action.”

He said the actions had “shown the country and the world that the United States is on top of the situation”.

But Democratic presidential candidate Barack Obama said: “History will not judge President Bush kindly for his failure to act in a way that could have prevented or alleviated this economic crisis.”

His rival for the Democratic Party’s nomination, former first lady Hillary Clinton, echoed his criticism and said it was a “moment of great unique uncertainty in our financial markets”.