Recession fears growing
Global recession fears continued to haunt world markets yesterday, sparking another volatile day of trading.
The FTSE 100 Index slumped by up to 3% at times, pushing it below the 5,000 barrier, as banking stocks tumbled amid fears that they were running out of cash and borrowers would not repay debts.
Markets were also dogged by worries that the US and eurozone economies would slide back into recession, crippled by the weight of their debts, while emerging markets such as China would also suffer.
London's leading share index clawed back most of its gains in late trading but still closed down 1%, or 51.5 points, at 5040.8.
Its performance was boosted by early gains made by the Dow Jones Industrial Average in the US, which helped to settle traders' nerves.
London's benchmark index also slumped 4.5% on Thursday after the biggest points fall for nearly three years.
Thursday's rout followed a downgrade of global growth forecasts by investment bank Morgan Stanley and poor economic data from the US.
Yesterday's falls mean the London market has now lost 5% of its value in the week, wiping £72.7bn from the value of the UK's biggest companies.
The banking sector saw further falls yesterday.
It bore the brunt of the losses on Thursday amid reports that US regulators are checking the American operations of European banks for possible contagion from
the eurozone debt crisis. Lloyds Banking was down another 5% yesterday after a 9% fall on Thursday, with Barclays following up an 11% fall with a 2% decline.
Taxpayer-backed Royal Bank of Scotland was also down 5%. Its shares are now at 20.8p — less than half the 50p-per-share price the Government paid for its 81% stake in the bank.
Shares in Lloyds are at 28.4p, compared with the 63p paid by the Government for its 41% stake.
One European bank is reported to have asked for $500m (£303m) from the European Central Bank's swap line with the US Federal Reserve as it could not get the money from the markets.
Concern over the health of French banks and their eurozone debt exposure was a major cause of the stock market slump earlier this month.
A plan by German chancellor Angela Merkel and French president Nicolas Sarkozy to tax financial transactions has also undermined share prices in the banks and other financial stocks.
The price of gold, which is seen as a safe haven by investors, increased to a new record of $1,878 an ounce.
Michael Hewson, an analyst at CMC Markets, said that investors had been spooked because recent economic data had “fallen off a cliff”, particularly after German and US GDP growth slowed drastically in the second quarter of 2011.
He said: “People are desperately nervous, which is why the price of gold is so high.
“It's the speed of the drop-off which is disconcerting people, and they are playing it safety-first,” Mr Hewson added.