Markets face huge annual losses

STOCK MARKETS worldwide plunged for the third consecutive day yesterday amid growing fears that the European chaos could lead to a financial collapse on the scale of the 2008 banking crisis.

The FTSE 100 flirted briefly with the 5,000 point mark, eventually finishing the day down 1.7 per cent at 5073.13, while the French CAC 40 index closed 2.3 per cent lower and Germany’s Dax dropped two per cent. In the US, the Dow Jones industrial average plunged 3.6 per cent, to 10,068.01 and the S&P 500 Index slid 3.9 per cent, to 1,071.59 – down 12 per cent from its 23 April closing high, and marking the worst trading day since late April 2009.

Analysts blamed the near-relentless selling on mounting concerns over the inability of Europe’s divided politicians to prevent a full-scale sovereign debt crisis and fears that the US financial reform bill, set to be voted on tonight, would increase restrictions on a banking industry – only just beginning to crawl out of the recession.

The falls were exacerbated by negative data on both sides of the Atlantic. In the US unexpectedly poor jobs data showed a 25,000 increase in jobless claims to 471,000 in the week ending 15 May. Coming hard on the heels of Wednesday’s drop in inflation, the data underlined worries that the US is exposed to a possible global double-dip recession. While in Europe the European Commission produced “flash” data showing consumer confidence falling from a 23-month high of -15 in April to a seven-month low of -17.5 in May.

Andrew Roberts, head of European rates strategy at RBS, warned “Great Depression II” could now be approaching, adding: “A European $1 trillion package which does little and political panic tells you we are about to reach the end of the road.”

Anxiety spilled into credit markets, where the cost of insuring against debt defaults rose sharply, in Greece, Spain, Portugal and Ireland. In another worrying sign the Libor-OIS spread used to gauge strains in interbank lending rose to a nine-month high of 25 basis points, while the Chicago Board Options Exchange Volatility index, often referred to as Wall Street’s fear gauge, surged almost 30 per cent to its highest closing level since March 2009.

The euro continued to trade close to a four-year low against the US dollar.

Bill Gross of bond fund Pimco said that hedge funds were starting to liquidate their positions in a bid to preserve their capital –a move he said was a “mini relapse” towards 2008 territory.