The FTSE-100 dipped below the psychologically-important 6000-point mark last night after its second consecutive day of significant falls as the first signs emerged that investors are seriously considering the prospect of a global recession.
The drop of 1.4%, or 82.7 points, saw the blue-chip index finish at 5942.9, its lowest close since August 16 last year at the height of worries about the credit crisis. It followed a 3% drop on Tuesday.
Other major markets also saw losses. The pan-European FTSEurofirst 300 index ended 0.9% lower at 1383.16 points having hit its lowest level since September 2006 earlier in the day. It has now fallen 7.4% since the start of the year. The French CAC-40 index closed down 16 points, or 0.4%, at 5234.9 and Germany's DAX also dropped 1%.
The US Dow Jones Industrial Average closed 34.95 points lower at 12,466.16 after a 277-point fall on Tuesday.
One reason for the dipping markets was revealed in research published by Merrill Lynch yesterday which showed almost one in five fund managers (19%) thinks a global recession is likely or very likely over the next 12 months. The percentage of respondents who think the world is already in recession doubled between December and January to 8%.
David Bowers, the independent consultant who prepares the research for Merrills, said: "This is the first month people have woken up to the possibility of a recession. People now believe it is a possibility."
Fund managers are very pessimistic about companies' ability to generate profits with 72% expecting a deterioration in corporate profits worldwide and 87% thinking it unlikely that global corporate earnings will rise 10% or more over the next 12 months.
Standard Life Investments global investment strategist Richard Batty thinks the beleaguered American consumer, weighed down with rising mortgage payments, falling house prices and a banking sector that is increasingly unwilling to lend money, will drag down economic growth in the US and expects a knock-on impact on Japan, the UK and continental Europe. Consumer spending accounts for around 75% of the US economy.
"For the US the consensus is that we will see 2% plus growth and we think the rises are much more to the down side of 1.5% for the whole year while the first half of the year could see very subdued growth. There is a possibility there is a recession or virtually no growth in the economy for a number of quarters," he said.
Not everyone is so bearish on the United States. Martin Currie fund manager Martin Walker said he did not anticipate a recession in the US because cash rich companies will be able to absorb a slowdown.
"Corporate balance sheets remain healthy. This will, I believe, see the economy through its difficult patch," he said.
But the credit crunch continued to weigh on corporate America yesterday as investment bank JP Morgan Chase, former prime minister Tony Blair's new employer, revealed that its profit dropped 24% in its fourth quarter. The US's third largest bank wrote $1.3bn off sub-prime mortgages exposure and set aside more money for rising losses on home-equity loans.
The prospect of slowing economic growth knocking fuel demand also hit the oil price which slid more than $2 a barrel to below $90 for the first time since mid-December.
At the same time higher costs for energy and food last year pushed US inflation up 4.1% for the whole of 2007, its highest level since 1990. This compares to inflation of 2.5% in 2006 and if it continues could put in doubt anticipated interest rate cuts which investors had hoped could boost the economy.
The Reserve is expected to cut rates by 0.5% when it meets later this week.
One exception to the bearishness is Ian Rushbrook of the Personal Assets Trust.
The trust has been around 100% invested in cash since the end of last year and Rushbrook has long anticipated a market fall. But announcements to the stock exchange seem to show he has been buying back into the market, leaving his fund around 80% in cash and similar assets.
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