Shares hit by new economic gloom

Nervous investors tasted “bear market” territory today as fresh economic gloom hit the UK’s leading shares.

The FTSE 100 Index was down as much as 2% early in the day after turmoil in Asian and US markets, while the British Chambers of Commerce’s warnings of recession knocked confidence in London.

At its lowest point, the Footsie fell to 5358.7 – more than 20% below its peak in June last year, and the classic definition of a “bear market” in which shares steadily decline.

Shares later made up some of the earlier losses on comments from US Federal Reserve chairman Ben Bernanke that policymakers could extend lending efforts to investment banks, helping Wall Street open higher this afternoon.

But more misery may be on the way for investors as the outlook for the UK economy darkens, experts warned.

Jonathan Loynes, chief European economist at Capital Economics, said: “The steep falls in equity prices seen over recent weeks have brought the UK stockmarket back into line with consensus expectations for the economy.

“These falls have come as part of a general downturn in global stockmarkets in response to renewed concerns over the outlook for the US and global economies and a drop in risk appetite.”

He added: “Were it not for the strength of the oil and mining sectors, the UK market would already be much lower.”

During one point in the trading session all Footsie stocks were in the red. Speculation that two American mortgage providers might have to raise fresh capital and make further write-downs hit Wall Street and put fresh pressure on a host of financial stocks in the UK.

Richard Hunter, head of equities at Hargreaves Lansdown stockbrokers, said: “Today’s fall marks a full entry into bear market territory, even though most investors will have been feeling that this has been here already for some months.”

Mr Hunter said fears of additional credit writedowns by banks and the prospect of lower corporate earnings added to the negative sentiment.

“At this precise moment, it is difficult to identify from where a positive catalyst might emerge,” he added.

Housebuilder Persimmon and estate agency Savills contributed to the gloom today by reporting sharply lower transaction levels and selling prices. Savills said the downturn had started to impact on the market for prime country property.

Persimmon has also cut 1,100 jobs – the latest in a succession of housebuilders to axe staff as the property market falls.

Homeowners are unlikely to get much relief from the Bank of England later this week. Fears over rising inflation mean the Bank is expected to keep the cost of borrowing at 5%, despite the boost a cut would give the economy.

Manoj Ladwa, a senior trader at TradIndex, said: “In normal circumstances, the case for the Bank of England to cut rates this Thursday at its regular monthly meeting would be cut and dried.

“But the price of oil and food means that the threat of inflation remains severe, and most analysts expect rates to remain unchanged.”