Fear stalks bourses as global markets in freefall

BRITAIN’S benchmark share index yesterday suffered its biggest one-day points drop for almost three years as world markets digested a slew of grim news which stoked fears that global growth is grinding to a halt.

Reaction to the US Federal Reserve’s grim assessment of the economy was the main driver for a widespread global stocks sell-off but it was also compounded by data showing more evidence of a slowdown in China.

The data suggested that China, the engine room of global growth in recent years, may not be able to offset flagging US and European economies, with factory output falling for a third consecutive month in September.

The Fed had earlier highlighted “significant downside risks” to the US outlook as it unveiled fresh economic stimulus measures – named Operation Twist – which will see it buy more long-term Treasury securities in an effort to lower borrowing rates and stimulate the economy.

Christine Lagarde, the head of the International Monetary Fund, told a press conference that the world’s biggest economies need to co-operate to restore stability to global financial markets.

Lagarde, pictured below, said the “collective momentum and the spirit” demonstrated at the Group of 20 meeting in London in April 2009 was now lacking.

She said regulators in many nations need to “step up to financial reform” and that the world needed “4 Rs” – repair, reform, rebalancing and rebuilding. World Bank president Robert Zoellick also said the world’s economy was “in a danger zone”.

The euro fell to an eight-month low against the dollar but later recovered some of its lost ground, although it was still down by almost 1 per cent in later trading in the US.

In the UK the FTSE 100 fell perilously close to the 5,000 level at one point but recovered from a day low of 5,013.55 to finish down 246.8 points – or 4.7 per cent – at 5,041.6.

While traders worried that the Fed’s latest plan will have little effect on lending, they did deem the market reaction to be overdone.

David Jones, chief market strategist at IG Index, said: “We have already seen some sizeable sell-offs this month and any weakness below the 5,100 level has proved short-lived. There is the potential for another U-turn after this early weakness if the bargain hunters are tempted out yet again.”

As well as global concerns, the UK market had come under pressure from the latest factory orders data from the CBI which showed weaker than expected figures for September as a slowdown in the world economy reduced overseas demand at the fastest pace in almost a year,

The monthly industrial survey showed the total order book balance fell to -9 this month from +1 in August, well below expectations of a reading of -5.

CBI chief economic adviser Ian McCafferty said: “UK manufacturers report some slackening in demand this month, following the volatility in financial markets and the slowdown in growth in our major trading partners.”