US equities staged a late recovery on Thursday after the London stock market tumbled more than 4 per cent, its biggest one-day fall since March 2003, as a flight from risky assets fuelled further market turmoil around the world.
The FTSE 100 index closed 250.4 points lower at 5,858.9, falling below the 6,000 level and hitting its lowest levels since September 2006. Financial and mining stocks suffered most.
There was some relief later when US stocks rebounded from steep early losses to close mixed. The S&P 500 index ended 0.3 per cent higher, powered by a late rally in financial stocks.
Michael Mayo, Deutsche Bank analyst, said that US bank and brokerage stocks rose on speculation that the Federal Reserve would cut interest rates in response to credit market turmoil.
The sell-off prompted the Treasury, in its first comments since the crisis began, to try to reassure investors and the public that the underlying UK and world economies remained sound.
“There will always be periods of uncertainty in the markets but the long-term decisions the government has taken – giving independence to the Bank of England, the fiscal rules and low and stable borrowing – have created a strong platform of economic stability,” it said.
The falls in London came as European indices suffered triple-digit falls, with France’s CAC 40 index down 3.3 per cent and Germany’s DAX down 2.4 per cent. Asian stock markets posted sharp declines. Tokyo’s Nikkei 225 index fell 2 per cent, while the Korean Kospi fell nearly 7 per cent.
“Credit market woes and [the] liquidity crunch continue to chip away at stock prices, with leverage becoming a dirty word,” said Tobias Levkovich, chief US equity strategist at Citigroup.
The fear in the markets sent investors piling into short-term US government debt, sending yields tumbling, particularly early in the New York day. Yields on one-month Treasury bills dipped as low as 2.4 per cent before trading at about 3.1 per cent later, 0.9 percentage points lower on the day.
In another sign of risk aversion, the yen soared as investors unwound carry trades whereby they borrowed in yen and invested in higher yielding currencies. The Japanese currency gained more than 5 per cent against the New Zealand dollar.
The Chicago Board Options Exchange’s Vix index, often called a fear gauge, jumped above 37, its highest level in nearly five years, before easing back to about 31.
Reflecting market expectations of early action by the Fed, futures markets were pricing in a quarter-point cut in the Fed funds overnight rate, at 5.25 per cent, even before the US central bank’s scheduled meeting on September 18. But William Poole, president of the St Louis Fed, said yesterday that only a “calamity” would justify a Fed interest rate cut before the meeting. He told Bloomberg that “no one has called up and said the sky is falling”.
But in a rare move, Michelle Smith, a spokeswoman for the Fed in Washington, said Mr Poole’s views did not necessarily represent those of the Fed’s interest rate setting committee.
In Canada, banks announced a plan to stabilise that country’s market for asset-backed commercial paper, the short-term debt on which many financial institutions and companies rely. But more symptoms of the credit crunch emerged, with shares in Countrywide Financial, the US mortgage lender, tumbling again after it drew on credit lines to boost its cash position.
Additional reporting by Javier Blas and Robert Orr
