More than £77 billion was wiped off the value of Britain’s stock market yesterday in its biggest one-day percentage loss since September 11, 2001. Shares across the world plunged over fears that the threatened US recession will undermine the global economy.

London’s leading shares tumbled by 5.5 per cent in brutal market conditions, with the FTSE 100 index losing more than 323 points, its steepest points fall on record, to end the day at 5,578.2.

George Soros, the billionaire investor who prompted Britain’s withdrawal from the European exchange-rate mechanism on Black Wednesday in 1992, said the situation was “much more serious than any financial crisis since the end of the war”. Investors were “drowning in a sea of red,” said Henk Potts, an equity strategist at Barclays Stockbrokers.

The losses in London and across Europe came as global markets remained fearful that President Bush’s plans for tax cuts to stave off a US recession would not give a big enough boost to growth. Warnings from two leading US banks that the losses from America’s sub-prime home loans crisis were spreading to China triggered a sell-off of shares in Asia, which quickly rippled around the world.

The FTSE is now on the brink of a new bear market. The index has fallen about 13 per cent since the start of the year — its worst start to any year since its creation in 1984. With the market now down more than 17 per cent from its recent peak, set in mid-July last year, it is on the verge of the 20 per cent losses that would now signal bear market conditions — when investors expect sustained declines in share values.

The latest bloody trading day fuelled growing anxieties that America’s economic woes will spread across the Atlantic and infect Britain at a time when the economy is already faltering under the toll of sliding house prices, and an emerging slowdown in consumer spending.

New York stock markets were closed yesterday, but traders will return today with futures markets already pointing to steep losses.

Fears over the outlook for shares worldwide and broader world economic prospects were stoked yesterday by Mr Soros, who told Der Standard, a Vienna daily newspaper, that the danger of a US recession spreading to Europe was clear. “Naturally there is such a threat,” he said. “It’s just surprising that this has been so little understood.”

The timing and tone of Mr Soros’s warning struck home with nerve-wracked investors in Europe already in a state of high anxiety over deteriorating US and European conditions.

Across Europe, bourses succumbed to a ferocious sell-off, with Germany’s benchmark Dax index plunging by 7 per cent, and France’s CAC40 registering losses on almost the same scale.

The combined losses of the London, Paris and Frankfurt markets alone amounted to more than $350 billion (£180 billion) — roughly the size of the combined economies of New Zealand, Hungary and Singapore.

Official acknowledgement of the dangers to world economies came from Dominique Strauss-Kahn, the managing director of the International Monetary Fund. “The situation is serious,” he said. “All countries are suffering from the slowdown in growth in the US.”

Signs emerged yesterday that China, which will be the biggest single national contributor to global growth this year, could be hit by serious losses at its banks from the US sub-prime home loans debacle. Until recently, investors had believed that Chinese banks were well-insulated from the crisis. But that assumption was challenged yesterday by warnings from two leading banks that big Chinese banking groups could be forced to write-down millions in losses on sub-prime investments.

China’s financial regulator said banks in his country had also built up substantial amount of bad loans during an investment boom.

Sliding scale

Biggest falls for the FTSE 100 or its equivalent since 1935

11.4% Oct 20, 1987 Fears over UK economic outlook
9.1% Oct 19, 1987 Black Monday
7.3% Mar 1, 1974 Shock Labour election win stuns market
7.2% Oct 26, 1987 Market swings lower after brief rally
6.4% 29 May, 1962 Big drop on US steel industry woes
6.4% Jan 2, 1975 Burmah Oil financial crisis
6.1% Mar 11, 1975 Wild market dip on Burmah Oil crisis fallout
5.7% Sept 11, 2001 Attack on the World Trade Centre
5.5% Jan 21, 2008 Investor fears of recession
5.5% Dec 6, 1973 Oil shocks, Opec raises prices
5.4% Sept 26, 1938 Second World War looms
5.4% Dec 14, 1973 Market dips again on oil crisis
5.4% Mar 16, 1938 Fears of war, rising taxes
5.4% Oct 22, 1987 October 1987 sell-off continued

Source: David Schwartz - Stock Market Historian.

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