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Markets in meltdown as both FTSE and Dow Jones plunge again amid recession fears
Last updated at 00:37am on 24.01.08• Dow Jones sharply down as wary investors fear recession
• Pressure mounts on Bank to follow Fed and slash rates
• Investor George Soros admits recession is likely
• Inflation fears forced Bank to hold rates last month
• Brown calls for meeting with European leaders to discuss crisis
Bank of England boss Mervyn King has hinted that a rate cut is imminent, despite inflationary fears
Although the FTSE 100 opened up brightly, by early afternoon it was down by more than 91.7 points at 5648 as pessimism took hold.
In the first minutes of trading the Dow Jones followed suit, falling by more than 189 points, or 1.58 percent, to 11,781.95. It later rallied but still at lower levels than yesterday's close.
Analysts now expect the credit crunch that has afflicted America to bite equally hard in the UK.
Despite the market gloom, hopes that the Bank of England will follow America's lead with dramatic interest rate cuts were dashed today after policymakers warned the UK's inflation outlook had "worsened markedly".
This morning, minutes of the January rates meeting highlighted the dilemma faced by the Bank's Monetary Policy Committee (MPC) after members raised concerns over a potent mix of slowing growth and rising inflation.
The minutes come amid growing calls for a 0.5 per cent cut in the cost of borrowing when the Bank next meets to discuss rates on February 6 and 7.
Last night, Bank of England Governor Mervyn King gave the strongest indication yet that an interest rate cut is imminent.
In a speech to the Institute of Directors in Bristol last night, King appeared to put pressure on the Committee to follow the Fed and cut rates.
He said that although inflation remains an "issue" the current interest rate of 5.5 per cent is "probably bearing down on demand."
Billionaire investor George Soros, who made 1 billion US dollars betting on the devaluation of the pound on Black Wednesday in 1992, suggested that he expected recession on both sides of the Atlantic.
Billionaire investor George Soros says that a recession will be hard to avoid
Asked about the prospect of recession in the US and UK, Mr Soros told the BBC Radio 4 Today programme:
"I think it will be very difficult to avoid it."
Mr Soros warned that the era of easy credit had come to an end: "I think credit expansion can't go any further than it has done, when you could effectively borrow 100 per cent with no money down on a house whose value has been inflated by the willingness of the banks to lend so much credit."
George Soros said it was right for governments and central banks to intervene to dampen market crashes, and suggested that part of the problem was under-regulation of the financial sector.
"I think we do have to rescue markets, otherwise we would go into a depression like we did in the 1930s," said Mr Soros.
"But since 1980, instead of imposing any kind of regulation or restrictions... markets have been left to their own devices.
"The authorities came to rely on the markets to right themselves. They ought to have known better, because they have in the past come to the rescue, so they ought to have known that the markets don't necessarily right themselves."
In Asia, investors woke up to news of the shock rate cut this morning and the Nikkei index in Japan, the Australian Stock Exchange and the benchmark Hang Seng in Hong Kong leapt as investors scrabbled for bargains.
After Monday's stock market turmoil, the U.S. Federal Reserve hit the panic button yesterday, slashing rates by 0.75 percentage points to 3.5 per cent.
The move has led to increasing pressure on the Bank of England to cut interest rates by 0.5 per cent.
In a desperate bid to calm the global stock market meltdown, the rate cut was even bigger than the emergency cut which followed 9/11.
It is the biggest rate cut in the U.S. since 1982 – and a sign of growing fears that a recession is just round the corner.
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Traders in London watch anxiously as the shares tumble yesterday morning
Sir Howard Davies, director of the London School of Economics, told Today: "I think that there is no chance of avoiding a recession in the US now, and I think the Fed's move shows that they believe that too - this was really a panic move yesterday.
"Personally, I think the chances of avoiding recession here are pretty slight, because we do have many of the same features of the US economy."
It was revealed today that inflation fears saw the Bank of England policymakers vote near-unanimously to hold interest rates at 5.5 per cent this month.
Minutes of the Bank's last rates meeting revealed the outlook for inflation "had worsened markedly" amid soaring oil and food costs and with energy price hikes on the horizon.
Eight of the nine members on the Monetary Policy Committee (MPC) voted against a back-to-back cut in rates earlier this month following the quarter-point reduction in December.
The MPC said it feared rate decreases in two successive months might suggest the Bank was "focused more on stabilising demand than meeting the inflation target".
Gordon Brown is currently meeting other world leaders and financial big-hitters at the World Economic Forum in Switzerland, where the banking crisis will be top of the agenda.
The Prime Minister is said to be pushing for a meeting of European leaders at Downing Street to discuss futher banking transparency in the wake of the Northern Rock crisis, according to the Guardian.
One expert said the U.S. was heading unavoidably towards "the worst post-war recession".
The emergency cut was described as a sign of "desperation", "panic" and of the Fed being "very, very, very worried".
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The pressure tells on traders' faces as the FTSE fluctuates violently
The shock therapy failed to calm investors' nerves, with the Dow Jones index plunging 465 points within minutes of opening, although it later rallied to close 128 points down.
But the FTSE index of Britain's 100 biggest companies, which had dropped 5.5 per cent on Monday, recovered yesterday.
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Despair in Tokyo: Traders watched helplessly as markets around the world plunged yesterday
Despite sharp falls in the morning, it closed up 2.9 per cent at 5,740, but it is still 11 per cent below its level at the start of the year.
The Federal Reserve had not been due to make its rates decision until next Wednesday, but the growing panic forced its hand.
In Hong Kong passers-by watched as share prices slumped yesterday
Another rate cut of up to 0.5 percentage points is expected to follow, meaning rates will have fallen 1.25 percentage points in a single week.
The Bank of England yesterday insisted that it will not follow the Fed with an emergency rate cut.
But experts pointed out that its most recent emergency cut – on September 18, 2001 – came the day after the Fed's last emergency cut.
If it does not make an emergency cut, the next decision by the Bank's monetary policy committee will be in a fortnight.
A Bank of England spokesman said: "There are no plans to bring it forward."
Speaking on BBC Radio 4, one of Gordon Brown's closest allies, the children's minister Ed Balls, added to the speculation about an imminent rate cut.
He said: "With inflation low, with the Bank of England able to cut interest rates, as we saw just a couple of months ago, I think that we are in a strong position."
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Pointing the way: A trader signals the direction of UK and European indices after the biggest single fall in Japan since 9/11
In a warning to cash-strapped families, Mr King said inflation, currently 2.1 per cent, could rise sharply because of soaring energy and food prices.
He said the coming year would pose the greatest economic challenges since the Bank of England was granted independence in 1997, and predicted economic activity could slow "quite sharply" in the short term as consumers save more of their income.
He called for Britons to save more of their money and issued a warning that the Government's spending levels could not continue.
A rate cut would cheer millions of homeowners who are struggling to cope with massive mortgage payments on top of other rising household bills.
If UK rates fell from 5.5 per cent to 4.75 per cent, it would cut more than £70 off the average family's monthly mortgage bill if passed on by lenders.
In the U.S. the radical rate cut by the Federal Reserve was criticised as "too little, too late".
It is this sentiment that adds to pressure on the Bank of England not to delay a cut.
Shadow Chancellor George Osborne attacked Labour for failing to prepare for what could prove to be a painful economic downturn.
He said: "Gordon Brown could have used the boom years to prepare Britain for the lean years.
"But thanks to his economic incompetence, he failed to take the tough long-term choices and so we are not well prepared to deal with the difficult economic times that may lie ahead."
Reader views (28)
Here's a sample of the latest views published.
Three decades (and ongoing) of blatcherist cronycapitalism is coming home to roost. Why the surprise?
- Jack, London UK
Paul (Bay Shore) - you may "not lose a cent", but the cents you do own will be worth even less than they are now. There's no end in sight to the dollar's catastrophic weakness.
- Mark, London
I am sorry Peteo but I don't see how Gordon Brown is responsible for the bad strategy of banks such from Northern Rock to Citigroup. It was their irresponsible lending and Alan Greenspan of the FED and the BoE cutting rates too much a few years ago that caused this mess. I bet you didn't complain then when cheap credit was freely available and house prices went to the moon. Unfortunately for many like you, it is now pay back time.
- James, London
Gordon Brown is awfully quiet now.
- Lordy, Islington, London
Gordon Brown gambled that the British Economy would carry on growing and all his calculations for Labour schemes are based on that premise. How wrong he was but of course he will blame it all on the rest of the world.
He was warned but he never listened, and we will have to pay the price for his overbearing ego.
- Nigel, Wimbledon
Speaking from experience the situation is on all fours with the crash of 1987, but will worsen because the electorate quite rightly do not have confidence in the government. In 1987 my stock market investments plunged by 30% in seven days of financial turbulence, and took 3 years to recover their initial value. My advice is look to building societies for a steady and risk free rate of growth - that is if you are able to access your money during the crash - I couldn't even make telephone contact with those I was investing with in 1987.
- El-Cid., Hull, East Yorks.,
Rats and ship. Our greedy little world in the hands of these large corporates and banks really does none of us or the planet any favors. With most of my friends unable to really enjoy their lives or their families because they are working all the hours god sends for them for banks who will sack them without a second's notice when the chips are down is it really worth it? You can't take it with you.
- Fly, London
Labour can't be blamed for the market. The same thing is happening in the United States under a conservative government. It's a global phenomenon.
- James, Bristol
Buy low, sell high. That's how you make money. Time to buy, buy, buy!
- Joyce, Los Angeles, CA USA
My understanding of trading, is that even if shares move up or down the bankers make profit.
We are the ones that are getting ripped off, through loss of jobs, loss of pensions, and usually fits the bill as well through taxes.
So the idea is to do it every so often, so that we are kept under control, and forgot about our dreams. I think it is called oppression.
Crm, I agree we have seen it all before. They must like it.
- Laurent, London UK
This is all going to be gone in five months and stocks will go up?
If so, why not buy a lot more stocks now?
No thanks.
- Marcia, Boston, USA
Recovery in 5 months?
We'll be lucky if there's a recovery in 5 years!
- Jpv, UK
How much did Bottler and company spend in support of Northern Rock?
- Jose, Wales
What would happen if the market crashed and nobody paid any attention, there probably wouldn't be a crash. People should turn off all the talking heads on CNN and CNBC,and go about their business as usual. This is more a confidence crisis than a financial one, and by the way, is not a recession a necessary part of the economic cycle?
- Dawn, Superior, WI , USA
Why don't we just pass a law that says "stocks can only go up" that should solve the problem. I also believe we need several meetings and resolutions which will make everything better again.
- Tim, USA
We haven't even seen the beginning of this meltdown. America no longer has any purchasing power as home equity loans have been shut off and credit cards are maxed out. Without purchasing power the jobs will very rapidly go south.
- Jerry, Columbus, USA
We are in a Bear market, simple as that. If you hold on you will just lose more.
- Ray, US
Famous quote: Economists have predicted 39 of the last two recessions.
- Jt, Bartlett, TN USA
Knee jerk, chicken little the sky is falling panic worldwide is going to make me even richer! The US economy is fundamentally sound. There will be a slight slowdown in growth, but hardly a recession. The housing market is in a predicted (by me of course) correction. Go ahead and sell, sell, sell at artificially deflated prices and I will buy, buy, buy! All the way to my next mansion purchase.
- Bob Buffet, USA
It's good that the President of the US has unveiled his growth package, but with Asia now becoming a supergiant and Russia showing its aggression along with Germany coming into its own power. How long do you think this artificial boost is going to last? The US is seen as a superpower who's weakening. It has given away all of its strengths that made the US great. Eventually the bottom is going to fall out, and when will the world tell the unsuspecting people? Will we just wake up one day and you say: "oh by the way, the stock market has crashed".
- Sharron Mcgee, Eau Claire, USA
One large sum of money borrowing from another large sum of money that wants more money. The small investor thinks that people are "nervous" so the stocks go down--not so my friends they go down because of large manipulations by huge corporations shifting money around and counting on the average Jo and Jane to sell off their stocks which drives the prices down and then in come the feeding frenzy by those unlisted and guarded by the international banking scheme that is so evidently at play here.
Relax! Nothing is happening really other than these guys are getting mega rich and we are being more and more controlled but they count on us you know in that as we sway from right to left they ride the roller coaster up and down and that my friends are the players in the stock market.
- Eric Albronda, Mount Shasta, California
This is exactly why mortgage companies should stop offering adjustable rate mortgages (also known as ARM loans) and loans to people who can't afford them and are already over their heads in debt! They got greedy, and now look what they have done. Not only have they nearly single-handedly destroyed our economy, they have put many construction companies out of business, including the one my mum was laid off from! Shame on them!
- Tinkers, Fort Worth, TX, USA
I reckon this has happened because it is the most depressing day of the year.
I cannot imagine this would have happened if the sun had been shining with temperatures near 20C, a conservative government newly elected, London all decked out for high days and holidays and a shopping boom driven by real money!
- William Grierson, Kimpton, UK
I'll believe it's the end when instead of "uncertainty" prevailing to crash
stocks, "certainty" does it!
- G. De Feo, Brooklyn, NY, USA
Glad I'm in all cash so when the US market tumbles tomorrow I won't lose 1 cent..
- Paul, Bay Shore, USA
Now who's going to have to lower interest rates? The pound and euro have been benefiting vis a vie the dollar becasue of low rates in the US. Hopefully with a stronger dollar the price of oil can moderate.
- Earl Of Grey, St. Augustine, FL USA
Investors are the worst people to be dictating the health of the global economy; many would sell today at a loss in a blind panic rather than hold on for 5 months and profit from the inevitable recovery. Markets go up and markets fall; we've all seen it before so why overreact?
- Crm, London
And I am afraid Nu Labor has outrun its welcome! Crash Gordon please go away!
- Peteo, Islington, London
