European shares hit lowest close in five-and-a-half years

European shares fell to their lowest close since mid-2003 yesterday, with investors rattled by official data that showed that Europe's economy was plunging into a recession. The FTSEurofirst 300 index of top European shares fell 5.4 per cent to close unofficially at 825.32 points, its lowest close since May 2003, and having sunk as low as 787.29 earlier in the session.

The index lost 7.8 per cent over the week, and has lost 22.4 per cent this month.

Across Europe, Britain's FTSE 100, Germany's DAX and France's CAC-40 fell between 3.8 and 5.6 per cent.

"I sense we've moved beyond the credit crisis. There's a recognition of the damage inflicted on the global economy, that is the recession, by the credit crisis," said Mike Lenhoff, strategist at Brewin Dolphin. "It's not just limited to the developed world. You can run but you can't hide anywhere." Banks took the most points off the index. HSBC slumped 17.7 per cent, hit by growing fears of a slowdown in emerging markets.

HSBC's fall was prompted by a Morgan Stanley price target cut to 580 pence from 630 pence and forecasting a 50 per cent dividend cut for 2009.

Standard Chartered, also exposed to emerging markets, fell 15.8 per cent. HBOS fell 17.7 per cent.

France's Societe Generale dropped 7.6 per cent. Seven French banks have requested a total of €5 billion in loans from a state refinancing vehicle.

Energy groups were being hammered as crude fell more than seven per cent to just over $63 a barrel, before recovering to $64.90, as the perceived effects of a prolonged recession more than outweighed Opec's announcement that it will cut production by 1.5 million barrels a day from November 1.

BG Group, BP, Royal Dutch Shell and Total were down between 3.6 and 7.3 per cent.

Meanwhile Wall Street joined a global market rout yesterday that kicked off in Japan, led Russia to suspend trading and sent oil and other commodities tumbling on fears of a deep worldwide recession.

US stock indexes fell around four per cent.

News of a contraction in Britain's economy deepened fears of a worldwide recession stemming from the worst financial crisis in 80 years. China warned the outlook was grim.

Foreign exchange markets saw extreme volatility with the yen rocketing to multiyear highs against the dollar and euro. The euro/yen rate fell 10 per cent at one point.

Britain's economy shrank 0.5 per cent in the third quarter, and analysts said eurozone figures showed the 15-nation currency bloc was already in recession.

The pace of existing-home sales in the US rose sharply last month, but a Reuters poll of economists suggested battered US home prices will decline into next year and a possible recovery in 2010 will be meek at best.

Stock markets were in freefall around the world as panicked investors moved to liquidate risky positions. Japan's Nikkei index ended down 9.6 per cent and European shares dropped 6.5 per cent.

The Dow, the S&P 500, and the Nasdaq dropped around four per cent. The price of US government bonds rose as investors exited stocks.

"I would characterise this as a shell-shocked mentality out there," said Thomas di Galoma, head of government bond trading at Jefferies & Co. in New York. "It's all the deleveraging of equities... It's causing an issue for everyone."

Russia suspended trading on its stock market until at least Tuesday after the market lost more than a tenth of its value yesterday, hitting its lowest levels since late 2004.

"The global financial crisis has been constantly spreading and worsening, creating a severe shock to global economic growth," Chinese Premier Wen Jiabao told an Asia-Europe Meeting of 27 EU member states and 16 Asian nations.

Opec, meeting in emergency session, agreed to cut oil output by 1.5 million barrels per day in an attempt to halt the steep slide in the price of oil. But the price of US crude fell five per cent towards $64 as economic gloom overshadowed the cut.