A growing realisation that the global economy will not escape a US slowdown saw stocks around the world tumble on Wednesday while investors sought safety in government bonds.
Fears intensified amid concerns that more bad news from banks could emerge while US markets are closed for Thursday’s Thanksgiving holiday.
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Analysts said investors were becoming increasingly worried that funding problems among financial institutions could drive the faltering US economy into a recession next year, curtailing global economic growth.
William O’Donnell, strategist at UBS, said: “Global stock markets have been hit hard as investors are coming to realise that it will not be different this time and US economic weakness does matter.”
Investors are likely to be further unsettled by an Organisation for Economic Co-operation and Development report saying deteriorating conditions in the US subprime markets could lead to losses of$300bn in the collateralised debt obligation market.
After a sharp opening decline, Wall Street recovered in later trading but there were heavy falls in Asia and Europe.
The slide in global shares came as oil approached $100 a barrel – though it fell back sharply – and the dollar set a record low of $1.4856 against the euro and $1.1025 against the Swiss franc. The dollar also fell to Y108.27, its weakest level since May 2005 against the Japanese currency.
The S&P 500 fell 1.3 per cent and briefly entered negative territory for the year. At midday in New York the index was just 0.2 per cent higher for the year and back at levels seen in mid-August when the credit squeeze erupted.
The S&P financials sector fell 2.1 per cent and is now at its lowest level in two years. Freddie Mac, the US government-sponsored mortgage agency, fell 3 per cent to $25.94 after plunging 28.7 per cent on Tuesday in the wake of reporting a $2bn loss.
In London, the FTSE 100 declined 2.5 per cent and the FTSE Eurofirst 300 index fell 2.4 per cent. Hong Kong’s Hang Seng index lost 4.2 per cent and the Nikkei 222 fell 2.5 per cent.
As investors rushed into government paper, the yield on the two-year US Treasury note fell below 3 per cent and is more than 1.5 per cent below where the Federal Reserve sets the cost of overnight borrowing.
David Ader, bond strategist at RBS Greenwich Capital, said: “The dam has opened and . . . there is an overwhelming momentum to buy government bonds and sell other assets.’’ Volume in US Treasuries was double the usual pre-Thanksgiving flows over the past two years, he said.
The yield on the 10-year Treasury fell below 4 per cent, its lowest level since the start of 2005. Across the Atlantic, two-year yields in the euro-zone fell 7 basis points to 3.65 per cent.
Worries about mortgage-backed debt spread to the €1,600bn covered bond market in Europe, with yields on such bonds leaping sharply higher.
The volatility led a newly-formed committee of market makers to suspend inter-bank market making obligations until Monday to try and slow the market moves. Banks will still trade bonds with investors, but no longer have to offer constant quotes to each other.
Additional reporting by Paul J. Davies in London
