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‘It’s irrational fear. The markets will trash anything that walks’

Times Online:rss

- 23 hours and 11 minutes ago

“This is worse than a divorce. I’ve lost half my net worth and I still have a wife,” said one shell-shocked share trader at the end of the worst day on the stock market for twenty years. There was the usual grim and politically incorrect humour. There was the usual blaming of everybody else, particularly the politicians. But the main emotions were panic and fear. Panic at what was happening and fear that it might get worse. It wasn’t supposed to be this way. The Bank of England’s half-point interest rate cut on Wednesday was supposed to show its determination to prevent an economic slowdown turning into a slump. The £500 billion support package for Britain’s banks was supposed to restore confidence in the financial system. But, of course, the unprecedented moves also sent another signal. If the Bank and the Government are prepared to take such desperate measures, they must be really worried. The biggest worry is not that the actions taken by the Government -which are likely to be copied by other countries - will not work to stabilise the financial system. The worry is that even if they do work they will not prevent a deep worldwide recession. It was that fear that lay behind yesterday’s panic in the markets. The crisis has spread way beyond its origins in the US financial system. One of the triggers for the latest stockmarket slump was concerns about General Motors, whose shares tumbled 31 per cent to their lowest since 1950 on Thursday on worries that it might go bankrupt. And investors fear that the economic slowdown in the US and Europe is now spreading to fast-growing Asian markets. The panic in London started as soon as traders saw the slump in New York trading on Thursday night. A sudden collapse in the last hour of trading left American shares down about 7 per cent. Many London traders saw the news on TV screens in City bars where they were quenching the “Thursday thirst”. They left early to get into the office first thing next morning. When they arrived they surveyed the damage in Asia, where the Tokyo market dropped almost 10 per cent, for a fall of 24 per cent on the week. Within minutes of the London market opening at 8am, the FTSE 100 index was down 10 per cent, as more than £100 billion was wiped off the value of Britain’s top 100 companies. Shares swung wildly during the day and the losses were pared back in the afternoon, helped by a rally in early New York trading. But as US shares slumped back London followed, driving the FTSE 100 back down to close 8.9 per cent lower at 3,932. Investors dumped shares and anything deemed remotely risky, putting the money into gold and cash. “There are only two positions you can have in this market: cash or foetal,” was the gag going round the floor of the New York Stock Exchange. The volume of trading was relatively light with the big pension funds and insurance companies sitting on the sidelines. This gave the optimists some hope. They argued that much of the fall was due to selling by hedge funds and other investors that had debt secured against their shareholdings. When these fell in value they were forced to sell by their banks, putting further pressure on share prices. Some of the selling was by investors who had been lent money by Icelandic banks that were pulling in their loans after being nationalised this week. But the pessimists said there could be further to go. “The market is trying to find the bottom and it’s just not there,” said the head of one of Britain’s biggest banks. “Irrational fear has gripped and it seems that markets will now trash almost anything that walks. For now it is unstoppable,” said Howard Wheeldon, senior strategist at BGC Partners. The collapse was particularly alarming as it came after this week’s emergency half-point interest rate cuts by Western central banks and the unveiling by the Government of a £500 billion plan to support Britain’s top banks. “We may well see another round of interest rate cuts next week,” said Mr Wheeldon. “Whatever, it is increasingly clear that attempts by the US and UK government to address the vast number of capital market issues just isn’t enough.” The bank support plan was widely acclaimed as stopping the rot in the financial system by forcing the banks to raise more capital, with taxpayers’ money if need be, and by guaranteeing new bank borrowing. In particular, it was hoped that the plan would boost confidence in the banks who have become unwilling to lend to other banks because they fear they may not get the money back. But the interest rate at which banks are prepared to lend to each other has increased since the support plan was unveiled. The head of one of Britain’s leading banks said that confidence should start to improve over the next few days. But some bankers say it is essential that other countries follow the UK lead by forcing their banks to raise capital. Other countries are examining the British plan and the US Government is looking at offering taxpayers’ money to inject into American banks, and considering guaranteeing bank debt. In London, banks were the biggest fallers with Royal Bank of Scotland down 25 per cent and HBOS down 19 per cent, as investors worried about how much the value of existing shares will be diluted by the news of the capital that must be raised. Shares in big mining companies fell sharply on fears that lower growth in India and China will reduce demand and hit metal prices. This also weakened the oil price which fell almost $8 to $78.86, compared with a high of $147 in July. But gold, seen as a safe haven in the current turmoil, rose. There were wild swings in currencies, with the pound falling to $1.69, its lowest level for five years against the dollar, and it was down 1.2 per cent against the euro. Shares in fund management companies fell sharply amid fears that retail investors will pull money out of unit trusts. European stock markets were down in line with London while trading in Moscow was suspended. The meltdown was being dubbed the Crash of 2008 and older traders were comparing it with Black Wednesday in 1987. The fall this week of 21 per cent was not as bad as the 28.3 per cent fall 21 years ago. But some traders were saying it was worse. $“At least then it was a short, sharp, shock on one day. This has been relentless all week.” All eyes are now on the meeting in Washington of finance ministers and central bank chiefs from the West’s leading economies. The US stock market recovered towards the end of trading and the Dow Jones average closed down only 1.5 per cent. If governments can provide some reassurance in Washington the optimists say that shares could rebound on Monday, when New York trading is closed. The doomsters say the FTSE 100 has another 1,000 points to go before it hits bottom. Traders are expected to be in early again on Monday morning.