World markets suffered a frenzied sell-off yesterday as investors panicked the global economy was headed for another slump, one which policymakers are ill-equipped to prevent.
From New York to Moscow it was a brutal day for investors as countless billions of dollars were wiped off the value of companies globally.
The Dow Jones Industrial Average had lost close to four per cent of its value shortly before the close of trade in New York, down 388 points at 10,736.
In Europe, Asia and Latin America dealers’ screens were also awash with red. London’s FTSE-100 index closed down 4.7 per cent, the CAC-40 sank 5.3 per cent and in Frankfurt the DAX fell nearly five per cent.
The euro fell to its lowest level since January against the dollar, at $1.3466 at 1800 GMT as investors sought haven in the greenback.
The catalyst appeared to be Wednesday’s warning from the Federal Reserve that the already tepid US recovery faces serious risks, even as the bank appears to be running low on policy remedies.
“It’s the ever-increasing threat of another recession that is really spooking investors,” said analyst Simon Denham at Capital Spreads.
The Fed announced overnight that it would shift $400 billion in its shorter-term debt portfolio holdings to longer-term bonds, a move it said would lower rates for mortgage holders and businesses.
But the widely expected plan – nicknamed “Operation Twist” – was overshadowed after the Fed warned of “significant downside risks to the economic outlook” amid high unemployment, slow growth and a depressed housing market.
But concern about the world’s largest economy only heightened long-running fears that key pillars of the global economy are cracking under the strain of debt and slow growth.
As representatives from the world’s major economies gathered in Washington for a regular meeting of the G20 and the International Monetary Fund, there were increasing doubts that Europe can overcome political difference and decisively tackle its long-running debt crisis.
“Bad economic news from the United States and Europe, compounded by political paralysis and the risk of a serious policy mistake, continues to roil markets,” IHS chief economist Nariman Behravesh and IHS Global Insight economist Sara Johnson told clients.
The heads of the World Bank and IMF warned that Europe and the US risked “suffocating” the global economy if they didn’t get control of their economies.
World Bank president Robert Zoellick called for action, warning: “The world is in a danger zone.”
The IMF’s Christine Lagarde said that risks to the global economy have increased, “but there is a way forward, if countries act now, act boldly, and act together”.
But across the globe investors voted with their feet, pumping money into perceived safe-haven assets, notably the dollar and US government debt. It was stocks that bore the brunt of that flight to safety.
Michael Hewson of CMC Markets said “European markets have plunged today on a trifecta of different factors, starting with disappointment about last night’s measures by the Federal Reserve as well as its downbeat assessment of the US economy.”
He added that “fears about a slowdown in China on disappointing HSBC manufacturing PMI, which contracted for the third month in a row, and disappointing eurozone, French and German manufacturing PMI’s data,” also weighed on sentiment. “At various points throughout the day the all major companies of all the major indices were in negative territory,” Mr Hewson said.
In Hong Kong stocks fell 4.9 per cent to its lowest finish since July 2009. Tokyo shed 2.1 per cent and Shanghai lost 2.8 per cent.
Such was the scale of the fear that traders even shunned commodities, which have been kept buoyant by growth in China and other emerging markets.
Crude oil prices fell more than six per cent in New York, or $5.4 a barrel to 80.51 per cent. Even gold, considered a safe haven since the 2008 crisis, fell three per cent. Sentiment was further damaged by escalating concern over the banking sector in Europe, linked to contagion from the eurozone debt crisis and downgrades by Moody’s on three top US banks – Bank of America, Wells Fargo and Citigroup.
French banks were again hit hard with shares in Societe Generale and Credit Agricole down more than nine per cent and Franco-Belgian bank Dexia down more than 11 per cent yesterday.
Bank of America fell 5.4 per cent while Citigroup was down nearly seven per cent.