The perfect storm
Higher than expected inflation figures and growing concerns about the banking sector knocked London’s FTSE 100 index of leading stocks down 2.4 per cent yesterday to under 5,200.
The benchmark index has now fallen 23 per cent since a June 2007 high and is in clear bear market territory.
Bank stocks, unsettled by fears that the contagion from the US sub-prime market is spreading, fell to their lowest since 2005, led by Royal Bank of Scotland and Barclays.
RBS shares lost more than 7 per cent, sending the FTSE 350 Banks Index to the lowest point since October 1998.
BT dropped after the phone company said it will suspend a buyback programme, while Kazakhmys led mining companies lower after the copper producer said it isn’t considering a reverse takeover.
In the US the Dow closed the day below 11,000 for the first time in two years after a session of gyrating share prices.
Stocks started badly as investors took fright at Sunday’s proposed rescue plan for the government-backed mortgage giants Freddie Mac and Fannie Mae.
While politicians chewed over the fairness of the plan, hedge fund manager Bill Ackman proposed an alternative strategy for the two institutions that would wipe out investors who own the companies’ common equity and preferred shares, while trying to protect U.S. taxpayers.
Comments from Federal Reserve chairman Ben Bernanke about the future of the US economy, in which he stressed there were difficult times ahead, led to a $7 fall in the price of oil – the biggest daily drop for 17 years – and then a consequent recovery before a final sell-off.
There are “significant downside risks to the outlook for growth” and “upside risks to the inflation outlook have intensified,” Bernanke said in testimony in Washington. In the UK, there are fears that rising inflation – yesterday’s headline figure of 3.8 per cent was higher than expected – will restrict the Bank of England’s freedom to cut interest rates.