MARKETS on both sides of the Atlantic plummeted yesterday as doubts over the strength of the global recovery and the possibility of a Europe-wide cash crisis triggered fears of a re-run of the 2008 recession when investors sold all but the safest assets.
The FTSE 100 crashed 3.1 per cent, closing at 4914.22 – its lowest level in 10 months and only its second close below 5,000 this year. The FTSE 100 has now fallen 14 per cent since its April peak. In the US the S&P 500 followed suit, dropping 3.1 per cent to 1,041.24 – its lowest level in eight months, while the Dow Jones Industrial Average plunged 2.65 per cent, to 9,870.30 – below the psychologically crucial 10,000 level. In Europe France’s CAC 40 lost four per cent and Germany's DAX 3.33 per cent.
Amid the share price falls, the euro fell 0.5 per cent to £0.8086, its lowest level against sterling for 19 months. The fall in equities coincided with a rush to buy bonds as investors flooded into perceived safe havens, with the benchmark 10-year Treasury dropping to 2.97 per cent – its lowest level since April 2009, while the 30-year bond’s yield fell below four per cent to its weakest level since October 2009.
The European Central Bank’s plans to close its emergency one-year loan provision – meaning banks tomorrow have to repay €442bn (£360bn), the biggest amount lent in a single liquidity operation – was the main reason behind the sell-off. There were fears of a potential liquidity shortfall of more than €100bn. The one-year loans will be replaced with three-month loans at a base rate of one per cent, potentially posing more difficulties for European banks already exposed to government debt of Spain, Portugal and Greece.
Key three-month euribor rates, which measure the cost at which banks are prepared to lend to each other, jumped to 0.761 per cent – the highest level since September
Concerns over the Eurozone banking system were compounded by worries about the health of the broader global economy – triggered by the Conference Board’s downward revision of China’s economic outlook in May. Meanwhile, US consumer confidence figures showed optimism about the world’s largest economy had tanked to 52.9 in June from 62.7 in May. “This is almost identical to two years ago – complacency giving way to the abundant risks out here,” said RBS strategist Andrew Roberts.