Markets tank on Libya and sovereign worries

INVESTORS deserted stock markets yesterday as a triple whammy of sovereign debt fears, poor US and Chinese economic data and fears over escalating levels of violence in the Middle East and Libya hit confidence.

Traders described the day as “a catalyst of negative sentiment” that caused a market rout and left the FTSE at a five-week low, down 1.55 per cent at 5,845.

US markets also slumped with the Dow Jones experiencing its worst day in seven months, closing down 1.87 per cent to 11,984.61. The Standard & Poor’s 500 Index closed 1.89 per cent lower at 1,295.1.

The rout in Europe started after Moody’s downgrade of Spain’s credit rating from Aa1 to Aa2 caused fears over the return of the sovereign debt crisis. The rating agency warned Spain had severely underestimated the cost of recapitalising its banks.

Continuing violence across Libya also weighed on markets, with fighting between rebels and forces loyal to Colonel Muammar Gaddafi intensifying across the country.

Gaddafi’s second son Saif al-Islam warned that his father was preparing full-scale military action to crush the rebellion and would never surrender even if the West invaded.

EU leaders however failed to reach agreement on how to deal with Gaddafi. France and Britain jointly called on the European Union to recognise the rebel council based in Benghazi. But US and Germany continued to block French and UK proposals for a no-fly zone.

Oil prices fell back despite the violence as news that China posted a $7.3bn trade deficit in February, its first in more than a year, stoked fears that its economic growth may have peaked. Brent crude traded at about $115.