Markets in turmoil

SHARES worldwide plunged yesterday as fears that Europe’s sovereign debt crisis would lead to a fresh collapse in the banking sector, and rising tensions between North and South Korea took their toll on jittery investors.

The FTSE 100 index plummeted, ending the day 2.5 per cent lower at 4,940.68, below the psychologically important 5,000 level and wiping £32.9bn off the value of the top share index. The FTSE has fallen 11 per cent so far this month putting it on track for its worst month since Lehman Brothers filed for bankruptcy in September 2008. The Dow Jones Industrial Average followed suit falling 2.9 per cent – to below 10,000 – but rebounded to close just 0.2 per cent lower at 10,043.67.

In London, banking stocks were most vulnerable. Shares in Lloyds Banking Group fell almost 10 per cent in response to concerns over its exposure to Spain. Barclays and Royal Bank of Scotland fell six per cent and three per cent respectively. And the three-month London interbank rate for borrowing dollars rose to its highest level since early July – a 10-month high of 0.54 per cent – as banks became more wary of lending to European institutions due to doubts over the value of their government debt portfolios. As investors abandoned equities, they rushed into “safe-haven” investments, including government debt and gold. The yield on 10-year UK government debt dropped to a seven-month low and gold prices shot above $1,200 an ounce, while oil fell below $68 a barrel as investors fled from risk.

The euro – at one point down one per cent to a near four-year low versus the dollar – recovered to just 0.02 per cent lower at $1.23740 as small buy orders pushed the 16-nation currency higher amid thin volume trading.

Investors are concerned that Greece’s debt crisis is spreading across the Eurozone, in particular to Spain – which yesterday saw four of its savings banks announce plans to combine in the latest attempt to restructure its financial sector. But the market was also spooked by North Korea’s threat of military action if the South continued to violate its waters.