Debt fears and US budget stalemate hit bourses

FEARS over out-of-control government debt on both sides of the Atlantic caused a bloodbath on world markets yesterday.

Continued deadlock over America’s budget deficit added to worries about European debt, with credit ratings agency Moody’s warning France’s cherished AAA rating is under threat.

In London, the FTSE 100 index dropped 2.6 per cent – hitting a six-week low – with France’s Cac-40 and the German Dax each sliding 3.4 per cent.

Wall Street fell to a month-low, with the Down closing down 2.2 per cent last night and the S&P 500 index falling 2 per cent to drop below 1,200 for the first time since October.

David Jones, chief market strategist at IG Index, said: “It’s a combination of political and economic worries weighing on markets with the afternoon’s focus on stalemate in the US to agree budget cuts.

“There is also concern that the new government in Spain may be slow off the mark to put in place austerity measures to avoid a bail-out – it does feel like we have been here before and the net result is that investors have little reason to be loading up on risk.”

In New York, traders warned that light trading volume, expected throughout the week due to Thursday’s US Thanksgiving holiday, could add to market volatility in the days ahead.

Rick Bensignor, chief market strategist at Merlin Securities in New York, said: “These days it’s pretty hard to have confidence in the political side of things. If you just don’t have enough buyers stepping in then it doesn’t take a lot of sellers to make market move down.”

Democrats and Republicans seemed unable to agree on where the budget should be cut. If a deal can’t be signed, cuts will be made across all government departments, sparking fears over the effect on the economy.