Fears send markets into freefall

Financial markets were in turmoil today after a collapse in share prices around the world.

Fears send markets into freefall

Financial markets were in turmoil today after a collapse in share prices around the world.

Fears that the the world economy could slip back into recession led London’s benchmark FTSE 100 Index to lose £50bn of its value – its biggest fall of the year.

Asian stock markets plummeted today as investors sold riskier assets amid fears the US is heading back into recession and Europe’s debt crisis is worsening.

Japan’s Nikkei 225 stock average slid 3.4% to 9,328.74 and Hong Kong’s Hang Seng dropped 4.4 % to 20,912.60.

South Korea’s Kospi index shed 3.6 % to 1,945 and Taiwan’s benchmark slumped 4.4 % to 7,952.98. Australia’s benchmark dropped 4% to 4,103.10.

The slump in the Far East came after the US stock market last night suffered one of its worst days ever, with the Dow Jones Index plummeting 4.3%.

The plunge in share prices came amid rising fears that Italy and Spain, the eurozone’s third and fourth largest economies, may need bailouts and widespread worries over the US’ economic recovery.

Richard Hunter, head of UK equities at Hargreaves Lansdown stockbrokers, said markets could continue to fall today, particularly if closely-watched jobs data from the US reveals a further slowdown in the economy.

He said: “Investors are pessimistic at the moment, the general market mood is to try to prepare for the worst.

“It’s difficult to see anything positive coming from the data today unless they reveal absolutely barnstorming figures.”

Worried traders are waiting for today’s release of US unemployment figures for July, which is expected to show weak job growth and a rise in the unemployment rate.

The plunge in global markets is further bad news for Chancellor George Osborne, who has faced increasing pressure over the pace of Britain’s economic recovery.

Robert Chote, chairman of the Office for Budget Responsibility, yesterday said the watchdog’s growth forecast of 1.7% – made in March – was likely to be missed.

GDP increased by a lacklustre 0.2% in the second quarter of 2011 after consumers reined in spending.

The growth fears led the Bank of England to hold interest rates at their record low of 0.5% today.

It is understood that the Government is monitoring the global markets closely and the Chancellor is receiving regular updates.

A Treasury spokesman said: “This is a time of uncertainty in the international economy. Because of our difficult decisions to reduce the deficit and tackle our debts, Britain has been stable during this time.

“The economy is growing and creating jobs.”

The collapse of shares in Europe was sparked after the cost of borrowing for the Spanish government rose sharply in a debt auction – indicating lenders have lost confidence in the country’s ability to handle its debts and avoid a bailout.

European Commission president Jose Manuel Barroso urged European leaders to rapidly reassess “all elements” of the eurozone’s bailout fund, known as the European Financial Stability Facility (EFSF), including its size.

The EFSF was equipped with new pre-emptive powers last month, including the ability to buy up distressed government bonds to support their prices or extending credit lines to countries before they are in full-blown crisis mode.

That was a recognition that rescue packages like the ones given to Ireland, Greece and Portugal would be far too expensive for big economies like Italy and Spain.

But analysts have said the fund will not be able to properly use these new powers at its current size of €440bn.

The FTSE 100 Index closed down 3.4%, or 191.4 points, at 5393.1 – its biggest daily drop since March 2009.

It follows a fall of 2.3% yesterday, which means that £85m has been wiped off its value in the past two days. It is now at its lowest point for nearly a year.

The Dow Jones lost 512.76 points which was the steepest points fall since December 2008. It was the ninth worst fall by points for the Dow.

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