London markets braced after Wall Street tumbles

Financial chaos: Russian worries hit US shares and undermine British takeover deals

FINANCIAL MARKETS around the world will open today in the shadow of a massive fall on the New York Stock Exchange, the second largest points drop.

The collapse followed weeks of losses after bad news from Asia and Russia began to seep through to America. It saw the Dow Jones industrial average fall well below its levels at the end of last year, erasing eight months of increases and threatening to put an end to eight years of rising markets. The long bull market has led to a near-quadrupling of the Dow, with all that means for individual investors.

The signs of weakness had been present for some weeks, with the Dow last week recording its largest weekly decline. But yesterday, after a small gain in early trading, the index plunged as traders unloaded stocks and buyers failed to enter the market in sufficient numbers to maintain levels. After the Dow slid through the 8,000 level, it accelerated in late trading. It closed down 512.61 at 7539.07, the second largest points loss. The largest was the record 524.26 point decline last October.

Though the decline outscored the 508 point fall of Black Monday, October 1987, it was well behind in percentage terms, at 6.4 per cent. Black Monday represented a 22.6 per cent fall. But the Dow is now 19.3 per cent down from its July peak, the biggest decline since the 1990 slide triggered by the Gulf War.

The collapse was broadly-based, with declining issues outnumbering advancing by 7 to 1 on a heavy volume of 924 million shares on the NYSE. Other indices fell just as heavily, or more, than the Dow. The technology-intensive Nasdaq composite index fell a record 140.52 points, or 8.5 per cent, to 1,499.16. Technology stocks have been hit by weakening exports to Asia, and low-cost competition from imports.

The Russian crisis has brought new concerns about the international economy, following hard on the heels of much larger problems in East Asia. Until now, economists have argued that the problems of the rest of the world need not have a deleterious impact on America, but confidence has dropped away as the US economy, too, has slowed, and as the financial sector in particular has started to count the cost of its involvement in Asia and Russia. Several US banks reported large losses last week from Russia's domestic bond market.

The Hong Kong and Singapore stock markets had fallen heavily earlier in the day, with the Hang Seng down 7.1 per cent or 554.70 points, to 7275.04, and Singapore's benchmark index down 3.25 per cent. Markets also fell in Germany, France, Italy, Switzerland and the Netherlands. London's financial markets were closed for a bank holiday, and have a lot of catching up to do today.

For the last two weeks, dealers and analysts have been waiting to see whether private investors would go the way of institutions and start pulling out of the market. Until the end of last week, it had looked as if they were still intent on taking the series of declines as a buying opportunity, but confidence seemed to seep away.

The Wall Street Journal reported yesterday that four of the country's top 10 largest stock mutual funds had seen investors taking more money out of funds than they put in; three had modest inflows; one was flat, and one declined to comment. The last time that all mutual funds reported a net monthly outflow was September 1990, before the present bull run began.

US households have poured a massive $1.1trillion into stock mutual funds since 1991, and control 59 per cent of all stocks, directly or through funds. Stocks account for 23 per cent of household assets, so a decline like the one seen yesterday have a very direct impact on household spending. So far, the US economy under Bill Clinton has powered ahead, fed by a virtuous circle of rising stock prices, capital expenditure, consumption and household investment; that may well have come to an end, threatening the US economy and the President's approval ratings.

Britain, which chairs the Group of Seven leading industrialised nations, had already said it was considering a meeting to look at Russia's problems, and that may move rapidly up the agenda now. Yesterday a spokesman for Tony Blair said that a meeting depended on progress in Russia, but the G7 may now look more widely, at the world economy, officials in Washington said.