FTSE plunges again after brief bounce
Jan 24 2008 by Iain Laing, The Journal
BLUE chip shares plunged back into the red yesterday as the London market’s short-lived rally came to an end on lingering concerns of a recession in America.
The FTSE 100 Index closed down 130.8 points at 5609.3 – a 2% drop – wiping out nearly all of the gains made in yesterday’s rebound after US rates were cut.
Heightened investor nerves saw stocks endure another day of extreme volatility, with the Footsie swinging dramatically between positive and negative territory.
The top flight index opened more than 100 points higher yesterday morning as investors were buoyed by the US Federal Reserve’s surprise move yesterday to cut interest rates in an effort to avoid recession.
But minutes of the Bank of England’s latest rate-setting meeting suggested that concerns over inflation will hamper any dramatic cuts on this side of the Atlantic.
Stocks were hit further as the Dow Jones Industrial Average plummeted by more than 200 points at one stage in early trade as markets doubted that the Fed’s cuts will be enough to prevent a recession. It later staged a remarkable rally to close up by almost 300 points.
In London, oil giants BP and Royal Dutch Shell were among those to suffer after weaker economic growth expectations caused oil prices to drop to US$88 a barrel.
Tuesday’s move by the Fed had buoyed investor spirits, with expectations that the Bank of England may follow suit. However, the minutes from the Bank’s latest rate meeting revealed that the outlook for inflation has “worsened markedly“ amid soaring oil and food costs and imminent energy price hikes.
This dampened hopes that the Bank will be able to cut rates as sharply as the Fed to bolster the economy, leading also to fears over its ability to stave off recession.
Official figures showed yesterday that the UK economy’s pace of growth eased to 0.6% in the final three months of last year.
A leading panel of influential economists in Ernst & Young’s Item Club recently predicted that growth could slow to 1.8% this year from 3.1% in 2007. Bank of England Governor Mervyn King also warned of a bleak economic outlook on Tuesday with rising food and energy prices possibly pushing inflation over 3%.
Mr King said the Bank faced a “difficult balancing act” between controlling inflation and preventing recession, and added: “The next year will pose economic challenges for all of us – more so than at any time since the Bank of England was given its independence in 1997.”
Martin Slaney, head of derivatives at GFT Global Markets, said: “We expect more vicious swings in market direction to continue. Overall, market confidence is low.
“Every rally we have seen recently has been sold into – a classic sign that we are entering into, if not already in, a bear market,” Mr Slaney said.
On Monday, £77bn was wiped off London’s leading shares in the biggest one-day fall since the 9/11 terror attacks in 2001 – although yesterday the Fed’s dramatic intervention triggered a partial recovery.
The Footsie is currently trading 13% below its opening level for 2008 and about 16% lower than the seven-year highs above 6,700 achieved last June.
