Stock markets across the world cracked yesterday, forcing Wall Street to suspend trading on a key futures contract to stem panic-selling while Moscow shut for business altogether.
Sharp losses in New York, London, Europe and the Far East raised the spectre that governments may be forced to impose emergency holidays to avert a meltdown across world stock markets.
Before Wall Street opened yesterday, American regulators suspended all trading of Dow Jones futures contracts, which had plunged. Such contracts allow traders to bet on the future direction of the Dow Jones index. The plunge had triggered an automatic circuit breaker, which halts trading to prevent a market sliding into freefall.
Nouriel Roubini, Professor of Economics at New York University, said that his prediction earlier this week that markets would have to be shut down is already coming true.
He said: “This morning, even before the markets in the US opened, the S&P futures fell by more than their daily limit. What I said yesterday has already started.”
A forced closure of stock markets in America would respresent the first time that Washington would have shut Wall Street since the terrorist attacks of September 2001. It would also have echoes of the 1930s, when President Franklin D. Roosevelt shut American banks during an enforced holiday.
Yesterday, investors became gripped with fear as they realised that recent attempts by central bankers to bail out financial institutions and cut interest rates would not prevent a severe global recession.
In New York, the Dow Jones industrial average plunged 312.30 points, or 3.6 per cent, to 8,378.95. In London, the FTSE 100 fell to its lowest level for five years, sinking 204 points, or 5 per cent, to 3,883. Among the biggest casualties were stocks that previously had been relative safe havens in otherwise crumbling sectors. Shares in HSBC plummeted 14 per cent to their lowest level since 2003 as traders worried about the level of exposure of some financial institutions to emerging economies, which this week have turned to the International Monetary Fund to seek cash loans.
Other banking stocks suffered sharp losses. Shares in Barclays, the bank that has just acquired part of Lehman Brothers, also fell 12 per cent. In New York, Goldman Sachs lost 7.5 per cent and Morgan Stanley slid 8.6 per cent.
Traders in London were spooked by new data showing that the UK economy had slowed far more than expected during the third quarter of the year, stoking fears that Britain is on the brink of a protracted recession.
The pound plunged against the US dollar, falling almost 5 per cent to $1.5522 as investors braced themselves for at least two years’ financial misery.
American investors fled to safe-haven investments, such as Treasury bonds. As demand for Treasuries drove up their price, the yield on the 30-year Government-backed bond fell to its lowest level since 1977.
Traders largely ignored new optimistic data indicating that America’s housing market may be heading for a recovery. They also ignored a slight easing in most benchmark Libor rates, which reflect the cost of borrowing money between banks.
Lord Myners, the new City Minister, said that the Bank of England’s ability to manage Britain’s financial stability had been “hampered by the limited instruments available to it”. Labour stripped the Bank of its power to regulate the financial sector as one its first moves when coming to power in 1997, moving the responsibility to the Financial Services Authority. Lax banking regulation has been blamed for the turmoil affecting global markets.
Philip Hammond, the Shadow Chief Secretary to the Treasury, said: “Paul Myners is developing a habit of voicing the uncomfortable truths that the Prime Minister can’t bring himself to admit . . . Gordon Brown’s own City Minister has agreed with us that his decision in 1997 to take powers away from the Bank of England is at the root of the financial crisis.”
New banking reform legislation will give the Bank statutory powers to oversee financial stability.
October 25, 2008
Suzy Jagger in New York
Source: The Times