INVESTORS around the world continued to slash their exposure to risk yesterday, as markets saw billions wiped off their values, with some hitting 12-month lows.
The sell-off spread from stock markets to currencies and metals as a global investor flight from risk intensified, and fears grew that fall-out from the US mortgage market could spark a funding crisis for financial institutions and companies worldwide.
Some 60 billion was wiped off share prices in London as the FTSE 100 share index slumped 250.4 points, or 4.1 per cent, to 5,858.9, its lowest level since September last year. This takes the fall from the 12-month July peak to 12.6 per cent.
Mining and banking shares were hammered, with the FTSE 350 banking sector down by another 3 per cent, while general financial firms were 6 per cent lower overall.
Heavyweight casualties included Man Group, which fell 40.5p to 446.75p, and Invesco, down 38.5p to 551.5p. Northern Rock suffered further losses as investors worried that the firm may issue a second profits warning in the space of two months. Its shares fell 4 per cent, or 28.5p to 659p. Barclays fell 28p at 605p. Standard Chartered slipped 7 per cent, or 118p, to 1,444p. Royal Bank of Scotland shares fell 3.2 per cent and HBOS 4.2 per cent.
In other major developments during the day:
• US stocks dropped sharply on concerns that deteriorating conditions in global credit markets could deal a blow to economic growth.
• Investor confidence ebbed anew after Countrywide Financial, the biggest US mortgage lender, said it drew down all of an $11.5 billion credit line to fund operations. The loan was funded by a group of 40 banks and is part of an "assortment of financing alternatives" put in place to supplement cash in turbulent markets, California-based Countrywide said. Countrywide turned to back-up financing amid a housing slump that has now forced at least 70 mortgage companies to close, go bankrupt or put themselves up for sale.
• A deteriorating US housing industry further fuelled investor fears. Two key indicators in the struggling home construction sector fell to ten-year lows in July and the number of US workers seeking jobless benefits rose, government data showed.
• The credit-rating agencies' watchdog is now facing a showdown with the European Commission next month over agencies' slow response in highlighting problems stemming from America's collapsing subprime mortgage market. Charlie McCreevy, the EU internal market commissioner, has written to Eddy Wymeersch, the chairman of the Committee of European Securities Regulators, requesting a meeting at which, according to a spokeswoman for the commission, they will discuss "the speed of response to market evidence of a shift in credit quality".
• Currency markets were in turmoil as the dollar tumbled more than 2 per cent against the Japanese yen after the Federal Reserve Bank of Philadelphia said its index of business conditions fell much more than expected in August. The yen was driven to a one-year high against the dollar as traders dumped carry trades and risky assets and sought the safety of government bonds and cash. The carry trade has been a key conduit of cheap finance for corporate bond funds and leveraged bids by US private equity funds.
• The US Federal Reserve said it had added $12 billion of temporary reserves to the banking system through overnight repurchase agreements.
• Despite the European Central Bank pump-priming money markets with extra cash last week, the cost of borrowing for any longer than a week was edging up. Three-month interbank interest rates rose to six-year highs yesterday. Short-term credit worries outweighed falling government bond yields in driving commercial borrowing costs higher.
• The price of oil dropped almost $3 as the credit and economic fears pounded the market, as a storm threat to US Gulf refineries and rigs receded. US crude fell $2.88 or 4 per cent to $70.47 a barrel,11 per cent below its record high of $78.77 earlier this month. London Brent crude was down $2.55 at $69.09.
• The stock market turmoil was reported to have plunged British company pension schemes back 21bn into the red, wiping out the surplus the country's major pension funds had built up in recent months. Only last week, respected City consulting actuaries Lane Clark & Peacock revealed research that claimed pension schemes belonging to the UK's biggest companies could soon slip back into deficit despite being back in the black for the first time in five years.
• Industrial metal prices fell sharply as investors liquidated positions to cover losses in other markets. Three-month copper fell 5.4 per cent on the London Metal Exchange, its lowest since April. Nickel, a key ingredient in stainless steel, dropped 5.5 per cent to a one-year low. Lead, used in batteries, fell 4.2 per cent to take the plunge since July to 18 per cent. Precious metals such as gold and platinum also sank.