Black Monday: recession fears spark global share crash

· FTSE suffers biggest fall since 2001
· Interest rate cuts predicted

• Larry Elliott, economics editor
• The Guardian,
• Tuesday January 22 2008

Fears that 2008 will see the looming recession in the US spreading to every other continent triggered a global crash in share prices yesterday, wiping £77bn off the value of the City's blue-chip stocks in the biggest one-day points fall in London's history.

On a day of panic selling, hefty overnight falls on far eastern stock markets prompted a ripple effect through Europe and left the City's FTSE 100 index down 323.5 points at 5578.2 at the close.

Since the start of the year share prices have dropped by 14%, with the near 900-point fall in the FTSE 100 wiping out all the gains of the last 18 months and putting renewed pressure on pension funds. Yesterday's 5.48% fall was the biggest in percentage terms since the immediate aftermath of the 9/11 terrorist attacks but less than half as big as the record 12.2% drop in October 1987.

In the City's money markets, traders were betting that the risk of a synchronised global downturn would force the Bank of England to cut interest rates by a full percentage point during the course of 2008 despite its concerns about inflationary pressure. Economists are expecting the toughest year for the UK since the pound was removed from the Exchange Rate Mechanism in 1992.

In the US, pressure is mounting on the Federal Reserve to cut interest rates by 0.75 points at its meeting later this month, taking its main policy rate down to 3.5%. Some analysts believe it will be necessary to cut rates to 1% by the end of this year to prevent the contagion from bad loans to subprime mortgage borrowers causing even more damage to the rest of the economy.

Shares in London closed near their lows for the day amid concerns that the market rout would continue today when Wall Street opens after being closed for the Martin Luther King public holiday. Last night, there were indications that the Dow Jones industrial average would open more than 600 points lower.

In other markets, Japan's Nikkei index was down almost 4%, while Germany's Dax and France's CAC index both fell by 7%. With markets in the developing world also suffering, the MSCI gauge of stock markets globally sank 3.3% percent, falling below its 2007 trough to lows last seen in December 2006 and taking it down more than 12% so far this year.

Dominique Strauss-Kahn, the managing director of the International Monetary Fund, warned western countries to expect knock-on effects from the slowdown in the US, the world's biggest economy. "The situation is serious," Strauss-Kahn said after meeting the French president, Nicolas Sarkozy. "All countries in the world are suffering from the slowdown in growth in the United States, all countries in the developed world."

After briefly rising above $100 a barrel earlier this month, the cost of oil fell by $2 a barrel to $88.59 yesterday in expectation that weaker demand for energy would push down the price of crude. Mining stocks were among the biggest losers in London amid concern that the boom in commodities seen in recent years would be ended by a global slowdown.

Nick Parsons, head of strategy for NAB Capital said: "There was no real trigger for what was a Black Monday. Overnight there was the very large sound of pennies dropping followed by a general market capitulation. What the markets have woken up to is that, yes, there will be a recession in the US and, no, the rest of the world won't be immune to that slowdown."

Graham Turner of GFC Economics said the gloomy mood in the markets might have been the delayed reaction to news last week of financial troubles for the US companies that insured the bonds linked to subprime mortgages, the value of which has plummeted as a result of falling real estate prices and rising home repossessions.

"The stock market has finally cracked and it has cracked because of all the underlying problems. People are worried about consumer spending going down, and with the stock market going down as well the two factors will start to feed off each other," said Turner.

On the day that the chancellor, Alistair Darling, announced his rescue plan for Northern Rock, the main UK casualty of the first wave of the subprime turmoil, the beleaguered bank was one of only a handful of shares to rise. But Scottish Widows became the third company in recent days to freeze its property fund following sharp falls in the price of commercial property. Investors will not be able to access their money for six months.

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