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Financial Times: Panic sparks plunge in global markets

By Joanna Chung and Robert Orr in London and Andrew Wood in Hong Kong
Published: January 21 2008 19:12 | Last updated: January 21 2008 21:45

Global equities plunged on Monday as investor concerns over the economic outlook and financial market turbulence snowballed into a sweeping sell-off.

Tumbling Asian shares led European stock markets into their biggest one-day fall since 9/11 as the prospect of a US recession and further fall-out from credit market turmoil prompted near panic among investors, who rushed to the safety of government bonds.

About €339bn ($490bn) was wiped off the market value of Europe’s FTSE Eurofirst 300 index and £76bn ($148bn) from the FTSE 100 index in London, which suffered its biggest points slide since it was formed in 1983.

Germany’s Xetra Dax slumped 7.2 per cent to 6,790.19 and France’s CAC-40 fell 6.8 per cent to 4,744.45, its worst one-day percentage point fall since September 11 2001.

“September 11 aside, I can’t remember a day like this. It was carnage,” said Jimmy Yates, a dealer at CMC Markets in London. “It’s been a really good four or five years but it looks like the end of the bull run.”

US markets were closed for the Martin Luther King Jr Day holiday on Monday, but the futures market suggests Wall Street will join the global rout when it resumes trading today.

“What we are seeing now has the hallmarks of both a financial shock and the beginning of a [US] recession, or at least of growth grinding to a halt,” said Credit Suisse’s fixed income strategy team in a research note.

Despite the dramatic falls, many believe there may be worse to come. “We believe the trough is not reached yet,” said Teun Draaisma, European equity strategist at Morgan Stanley.

Meanwhile, investors appeared to find little solace in an economic stimulus package aimed at averting a US recession. The pessimism comes on top of growing worries about future corporate earnings growth and fears that banks may reveal round of write-downs which would considerably reduce their future potential to extend credit to businesses.

Fears of further writedowns from big financial institutions and downgrades of bond insurers – so-called monolines – are un­nerving markets. There are also growing concerns about future corporate earnings growth. The cost of insuring the debt of 125 investment-grade companies in the iTraxx Europe index jumped 10 per cent.

“The news that some monoline insurers have seen their ratings lowered, potentially with more to come, has opened up a very nasty scenario,” said Andrew Milligan, head of global strategy at Standard Life Investments. “Financials may very well face another hefty round of write-offs which would reduce their future potential to extend credit to businesses, thus causing a vicious spiral to develop.”

On Friday Ambac, the second-biggest bond insurer, lost its triple-A credit rating from Fitch Ratings, a move set to undermine the company’s ability to attract business and hit billions of dollars of securities it guarantees.

Hints about further US rate cuts from Ben Bernanke, the US Federal Reserve chairman, and his endorsement of a fiscal stimulus package have done little to alleviate investor concerns.

Michael Cox of the Royal Bank of Scotland said: “We now believe that there are no public markets open to the monolines in their quest to raise capital…The only potential solution we can see that would enable triple-A ratings to be retained now is a co-ordinated bail-out by interested parties – banks and/or politicians.”

“In the past few weeks, the froth had been knocked off the markets but we haven’t seen real pain – until today,” said Ian Harnett, managing director of Absolute Strategy Research.

In Asia, Indian shares tumbled as much as 11 per cent before recovering a little to end the day 7.4 per cent down, Hong Kong closed 5.5 per cent down and Japan’s Nikkei average slid by nearly 4 per cent.

Additional reporting by Jamil Anderlini in Beijing, Geoff Dyer in Shanghai and Lindsay Whipp in Tokyo

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