It was the day that the fear factor took over. From Asia to South America, share prices tumbled yesterday as the world's investors gambled that a US recession was now inevitable.
In London, the City endured its darkest day since the nadir of 9/11. What Alan Greenspan once called the "irrational exuberance" of traders gambling on rising asset values has gone. In its place, a deep-rooted pessimism has taken hold.
In a single session, a massive £84bn was wiped off the value of Britain's biggest companies, as the FTSE 100 index plummeted by 5.5 per cent, closing 323.5 points lower at 5578.2. Last week the index dipped beneath the 6,000 mark for the first time since the credit crunch began in August. It was the eighth consecutive day of losses. Since Christmas Eve, the FTSE has dropped by almost 1,000 points and last night analysts were predicting further falls.
While President George Bush has authorised an economic rescue package to address the US sub-prime crisis, market experts believe the plan has come too late. And no one believes the world's other major economies will remain unscathed as America plunges into an economic downturn. For the world's biggest companies, recession in an export market as vital as the US can only spell trouble.
One senior UK-based trader said: "The fear is palpable as investors are getting more worried about the prospect of a recession in the US. In the current climate any vaguely scary news is pummelling the market." Martin Slaney, head of derivatives at GFT Global Markets, said: "The punches just keep coming. Ambivalence over Bush's rescue plan for the US economy was the trigger of this rout, causing fears of an economic slowdown."
The gloom and alarm coursing through the City was repeated wherever shares and stocks were changing hands. Europe suffered, with Germany's Dax index off 7.16 per cent and France's CAC 40 down 6.83 per cent. In Asia, Japan's Nikkei 225, which closed before trading in London, fell 3.86 per cent to a two-year low. The Hang Seng in Hong Kong lost 5.5 per cent, and Australia's ASX 200, was down 2.9 per cent. It was the ASX's 11th consecutive negative day, the longest losing run for a quarter of a century. David Buik, a market expert from Cantor Index, said: "The world is now in a severe credit crisis. Banks all over the world have been indiscriminately lending money to consumers and business alike and they will have to pull in their horns, which will affect growth throughout the world."
Poor economic data and corporate news, as well as an acceptance that the sub-prime mortgage fallout has further to go, "has created the highly distressed conditions for a global sell-off in equities", according to Mr Slaney, of GFT.
Philip Isherwood, European and UK equity strategist at Dresdner Kleinwort, said two factors had pushed the market towards the belief that a recession in the US was almost inevitable. With a sad irony, President Bush's belated attempt to alleviate the crisis overwhelming US financial institutions may have had the opposite effect.
On Friday, President Bush proposed a rescue package of up to $150bn to help stabilise the US economy, which is staggering in the wake of the sub-prime crisis. He called for the plan, based on tax relief, after admitting the country faced the risk of a downturn. That came in the run-up to a critical meeting at the Federal Reserve on 31 January, when the option of cutting interest rates will be discussed. The general consensus is towards a cut of 0.5 per cent.
But Mr Isherwood said: "Both the impending cuts and the rescue package have helped push the market towards thinking a recession in the US is near fact."
There may be no good option now. Further woes on the UK market and increased losses for the FTSE 100 are likely should the Fed sit on its hands.
As the rest of the financial world bet yesterday on a grim winter ahead, the US markets were closed to mark Martin Luther King Day. Traders felt the lack of direction from the US contributed to yesterday's falls in London. One said: "Investors were working on the worst assumptions for the opening tomorrow. Markets don't like uncertainty, and the lack of guidance on the Dow meant some just sold more aggressively."
The UK market was dragged down by the heavily weighted mining giants, as the market has been hit by fears of waning demand for metals. Rio Tinto and BHP Billiton, recently in talks over a $150bn merger, were the worst performers on the day, both shedding more than 10 per cent of their value. As the fear of recession looms, the banking sector tends to suffer: Royal Bank of Scotland fell 8.17 per cent to 342.75p; Lloyds TSB was down 6.92 per cent to 373.5p.
Mr Isherwood said a US recession would not automatically point to a recession here: "It is more debatable whether the UK will fall into recession. There has been some strength here, and the fundamental data is quite mixed. In the US, it points one way." It looked likely yesterday that the rest of the world would follow.