Market bloodbath as investors panic

The FTSE crashed by a massive 10% this morning, amid more huge losses around the globe...

Last Updated: 31 Aug 2010

It's been a devastating 24 hours for the stock markets. Fears of a very nasty global recession have sparked massive panic-selling all over the world, destroying trillions of dollars in shareholder value. After huge losses in the US and Asia overnight, the FTSE plummeted by nearly 440 points in the first few minutes of trading, a 10% fall - and although it has since rebounded slightly, it seems pretty clear that despite the concerted efforts of finance ministers this week, the end of the current crisis is still a long way off...

The trouble all started in the US, where the benchmark Dow Jones closed down 7.3%, falling below 9,000 points for the first time in five years. Then Tokyo went one better (or possibly worse): the Nikkei tumbled nearly 10%, its third-biggest fall ever and the biggest since 1987, as insurer Yamamoto Life became Japan's first big financial casualty. Hong Kong, India, Australia, the Philippines – every market was a sea of red (Indonesia pulled the plug entirely and suspended its stock market).

So today's bloodbath in European markets may have been predictable – but it was more ferocious than anyone expected. Although the FTSE recovered from its early lows, it’s still down around the 4,000 point-mark (down 300 points or 7%), while the French and German markets are also in the doldrums (and Austria and Russia suspended trading altogether). Here in the UK the banks have been hammered, as you’d expect, but so have the miners – indeed commodities are down across the board, including oil, while the pound plunged to another new low against the dollar. We think it’s fair to say that this week’s government interventions haven’t exactly calmed investor nerves...

One of the major factors behind all this panic selling is that later today, we should find out how bad the credit default swap situation relating to Lehman Brothers is. The banks that sold these derivatives – effectively an insurance policy against the bank going bust – will now be in line for huge claims. The area is so opaque that nobody knows how big these claims will be exactly – but they could run into hundreds of billions of dollars. This is another very good reason for banks to sit on their cash rather than lending it out to anyone, thus exacerbating the current problems.

And there’s clearly a vicious circle in operation here: the flow of bad news is causing investors to panic, which is driving them to sell, which is pushing markets further down, which is causing more panic, which is driving more selling, and so on. Investor confidence is shot to pieces, and it’s a bit hard to see what the world’s finance authorities can do to get it back...

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