Dow slide sends FTSE sharply lowerGraeme Wearden

Monday October 22, 2007

Guardian Unlimited

Share prices tumbled this morning in London in an eerie echo of the Black Monday crash of October 1987, as traders reacted to last Friday's shock plunge on Wall Street.

After falling 114 points in early trading, by 11.30am the FTSE 100 index was down by 85 points at 6,442.9, a fall of 1.3%. Traders said the fall indicated that there are still concerns over the health of the world economy.

British Energy was the biggest loser, plunging 10.5% after it warned that the reopening of two nuclear power plants had been delayed. Mining stocks were badly hit, with Antofagasta down 4.7%, Xstrata dropping 4.05% and Rio Tinto losing 3.8%.

In Europe, France's CAC index was down 1.78% and Germany's DAX was off 1.26%.
Asian markets also felt the gloom. Japan's Nikkei index closed at a four-week low of 16,438.47, a fall of 375.9 points or 1.7%.
With few major European companies reporting financial results today, investors will be watching the US closely this afternoon when Apple, Texas Instruments and American Express all release earnings figures.
Global markets had been expected to open sharply down today following the Dow Jones index's 367-point plunge to 13,522.02 on Friday – the 20th anniversary of Black Monday.
Most of the losses, which wiped 2.64% off the index of America's largest companies, came after the London market had closed.
The Dow's rapid decline was sparked by a profit warning from Caterpillar, the earth-moving equipment firm, and fears that oil could hit $100 a barrel.
Both the FTSE 100 and the Dow Jones have climbed over the last few weeks, in the face of concerns over the credit crunch and the health of the global economy.
This has partly been driven by private investors returning to the stock market in August and September. Capita Registrars, a UK company that handles shareholder records, said this morning that private investors ploughed almost £1bn more into the stock market over the last two months.
This is the first time in a year that private investors have put more money into the markets than they have taken out, and coincides with the recent bounce in share prices after they fell by around 13% between mid-summer and early August.
"Private investors had been positioning themselves for a stock market correction all year - and they were proved right," John Roundhill, a director of Capita Registrars, told Reuters.



IMF warns of decline in global economy· Markets braced for falls after Wall Street slump

Period of slower growth sparks fears of trade war Larry Elliott in Washington and Mark MilnerMonday October 22, 2007The Guardian
Stock markets around the world were braced for fresh falls today despite attempts by the G7 leading industrial nations and the International Monetary Fund to boost confidence after Friday's plunge in share prices on Wall Street.
The IMF's key policy-making committee said at the weekend that the recent turmoil in financial markets would lead to slower growth and that "downside risks to the outlook have increased".
On Friday, the 20th anniversary of the 1987 Black Monday market crash, Wall Street fell 367 points. Other exchanges that closed before the full extent of the New York slump are expected to open sharply weaker today.

Friday's selling was triggered by a profits warning from the earth-moving equipment group Caterpillar and lower-than-expected earnings from Wachovia, the fourth largest bank in the US. Analysts said the combination served to remind investors that the problems of the crunch in credit markets and the slowdown in the US housing market have not gone away.
Nick Parsons, head of markets strategy at nabCapital in London, said yesterday: "I have the feeling this is going to be a very, very tricky week. The surprise is not that [the market] is going to fall now. The surprise is that it has risen as much as it has over the last four or five weeks."
Behind the scenes at the annual meetings of the Fund and the World Bank, some policy makers admitted that they were concerned about a disorderly unwinding of the global imbalances triggered by a rapid fall in the value of the dollar.
The outgoing managing director of the IMF, Rodrigo de Rato, added to pressure on the greenback when he said that "in the medium term, the dollar is overvalued", adding: "The markets are also betting right now that the dollar is overvalued."
Some decline in the dollar is seen by the IMF as necessary for an orderly solution to the problem at the heart of the global imbalances - the trade surpluses built up by China and other Asian exporters and the trade deficit run by the United States.
Markets fear, however, that a too rapid decline in the dollar could set off a chain reaction through the global economy of rising inflation and slower growth and were looking for some signs at the weekend that policy makers had a plan for smooth adjustments on the foreign exchanges.
Yet the communiqué from the IMF's international monetary and financial committee released on Saturday provided no explicit support for the dollar and exchange rates were not discussed at Friday's meeting of G7 finance ministers and central bank governors.
The Fund and the G7 both kept up the pressure on China to re-value its currency, with the IMF communiqué noting that "an orderly unwinding of global imbalances, while sustaining global growth, is a shared responsibility". It also urged the US to use tougher tax and spending policies to cut its trade deficit, and Europe and Japan to implement structural reforms of their economies.
Amid growing concern that a period of slower growth could fan protectionist pressures in the west, the IMF called for a "prompt and ambitious" conclusion to the stalled Doha round of trade talks.
Pascal Lamy, the director general of the World Trade Organisation, told the IMFC on Saturday that "the hour of trade is very rapidly approaching" for negotiators.
A fresh attempt will be made to break the deadlock in the next month but Mr Lamy said that after six years of talks it was "probably our last chance to move this round to a successful conclusion".
Dark days
Black Monday, October 19 1987Wall Street falls 23%, the biggest drop in its history, while £50bn is wiped off share values in London, five times more than the previous biggest one day collapse
Black Tuesday, October 29 1929Seen as the day marking the transition in the US from the roaring twenties to the great depression. Wall Street falls almost 13% with (by the standards of the day) huge volumes of shares changing hands as investors' faith in the stock market collapses
Black Wednesday, September 16 1992Norman Lamont, then chancellor, uses vast amounts of reserves to prop up the pound. But traders such as George Soros know better and bet against the pound, making a huge profit when Britain crashes out of the ERM. Mr Lamont reportedly finishes the day singing in the bath
Black Thursday, October 24 1929The initial crash that sends the markets into freefall, culminating in widespread panic and long-term consequences the following Tuesday



IMF remains blind to the looming crisisIt is clear from recent events is that the Fund is a diminished institution

Larry Elliott, economics editor

Monday October 22, 2007

The Guardian
There were two explanations for Friday's sharp fall in share prices on Wall Street. The first was that it was the 20th anniversary of the 1987 crash and for some reason remembrance of things past made dealers go weak at the knees. The second was that the fantasists of Lower Manhattan finally came out of denial about the true state of the world.
The great and the good of the global economy tend towards the second explanation, whatever platitudes they utter in public. When they gathered for the annual meetings of the International Monetary Fund and World Bank it was against a backdrop of soaring oil prices and a plunging dollar. The G7, which in recent years has spent much of its time and energy coming up with communiqués stressing the need for debt relief for Africa, this year had its mind on pressing concerns closer to home. Not that the communiqué, with its ritual calls for Beijing to allow the renminbi to float higher on the foreign exchanges, meant much. The leading Chinese policy makers stayed at home rather than be lectured to in Washington and as a result the G7 didn't see the point of discussing exchange rates.

Henry Paulson, the US Treasury secretary, was full of soothing words after the G7 meeting. The global economy? Strong. The US economy? Apart from the housing market, in rude good health. The financial markets? In better shape than they were in August. Surging oil prices? Less of a problem than they used to be when economic output was more energy intensive. Dr Pangloss is alive and well.
Yet, as the IMF pointed out in its half-yearly World Economic Outlook, the risks are clearly identifiable. Globalisation has meant that the bundling of loans into complex financial instruments whose value depends on the state of the property market in the US can trigger bank crashes in Britain.
The Fund is itself in denial when it repeats year in and year out that the fundamentals of the global economy are sound. It is hard to know what to make of this statement when the mismatch of demand and supply in the energy market has quadrupled the cost of crude oil in little more than four years, the US has experienced the biggest housing boom-bust in its history and the dollar is in freefall. What's more the chronic global imbalances that are the root cause of most of the risks to prosperity and stability are not going to be solved until the big players stare disaster full in the face.
To understand why the fundamentals of the global economy are not sound, it is necessary to go back in time. For the first quarter of a century after the second world war, the IMF presided over the Bretton Woods system. Foreign exchange rates were fixed against the dollar, which itself was fixed against gold. In the early 1970s, higher inflation in the US prompted by the Vietnam war and the costs of Lyndon Johnson's Great Society programmes meant Washington could no longer maintain the gold peg and the Bretton Woods system disintegrated.
The upshot was a move towards flexible exchange rates for the leading developed countries, with developing nations tending to keep their currencies fixed against the dollar. The dangers of this hybrid system - not so much Bretton Woods 2 as Bretton Woods 1.5 - are now being exposed. Under Bretton Woods 1.5, some currencies float - sterling for example finds its own level against the dollar and the euro - but some do not. Some Asian currencies - most notably China's - are fixed against the dollar at levels which ensure that the US runs a systematic current account deficit and China runs a current account surplus.
Like many other countries in the region, the lesson China learned from the Asian financial crisis of 1997 was that it needed to build up a war chest of foreign exchange reserves that could be deployed in the event of a speculative attack. Running a cheap currency policy has enabled them to do this by promoting export-led growth.
In a low-interest-rate environment, the search has been on for investments that offer higher yields. That has meant traditional risk analysis went out of the window, resulting in sub-prime mortgages, the yen carry trade and all the other speculative plays beloved of the financial markets in recent years.
Eighteen months ago the IMF launched a process known as multilateral surveillance, in which a handful of key global players - the United States, China, Saudi Arabia and Europe - got together to discuss what to do about the global imbalances. This innovation was welcomed as a means of returning the Fund to its original role of smoothing out big economic problems rather than sticking its nose into every nook and cranny of its member states (particularly those that were poor).
In the event there was little of substance in terms of policy changes that emerged from the discussions and privately there were those in Washington this weekend who feared that the sharp fall in the value of the dollar could herald a disorderly adjustment of the imbalances. If that happens, the Fund will have to raise its game - and quickly.
The one clear message from the events of the past few days is that the IMF is a much diminished institution. It is not just that the size of the Fund's lending portfolio has shrunk - that, in itself, is symptomatic of the institution's lack of legitimacy with a large slice of its membership. In the teeth of opposition from developing countries, Europe has insisted on its anachronistic privilege of nominating the managing director, only to find that the last two men placed in Washington have scuttled back to their home countries. With the latest incumbent, it is a case of Rodrigo de Rato leaving a sinking ship.
Dominique Strauss-Kahn, therefore, arrives at the Fund with staff morale at low ebb, his organisation in desperate need of a more democratic voting structure and - above all - a vision relevant to the modern world.
Larry Summers, the former US Treasury secretary, was highly critical of the Fund at the weekend for its failure to come up with specific solutions to the economic problems facing the world. Strauss-Kahn says he has a radical blueprint to unveil. Let's hope he's right, because one is sorely needed. And there may not be much time.
larry.elliott@guardian.co.uk