Stock markets tumbled across the Western world yesterday as Israel's assassination of the spiritual leader of the militant group Hamas triggered fresh security fears just days after the Spanish bomb attacks.
Billions of pounds were wiped off the value of shares in London, New York, Frankfurt, Paris, Madrid and every other major trading centre in Europe.
The rapid escalation of violence in the Middle East sent investors scrambling for safe havens for their money such as gold, whose prices hit a two-month high.
Jeremy Batstone, research director at Fyshe Group stockbrokers, said: "We are all walking a tightrope that's a consequence of the dangerous escalation of the situation in the Middle East." He said yesterday's violence had occurred while markets were still recovering from the Madrid bombings last week and had reinforced mounting concern over the sustainability of the global economic recovery.
On Wall Street the Dow Jones industrial average plunged as much 150 points before closing 121.85 points or 1.2 per cent lower at 10,064.75. The Nasdaq composite fell 30.56 points, or 1.57 per cent, to 1,909.91
In London the FTSE 100 fell 98 points or 2.3 per cent before ending down 83.9 at 4,333.8, its worst finish since 16 December. The French, German, Italian, Spanish, Dutch and Swiss blue chip markets also all fell at least 2 per cent.
Richard Batty, a global investment strategist at Standard Life Investments, said: "This is obviously concerning the markets given what happened in Madrid."
The prime losers were travel stocks as dealers dumped shares that could be hit by a fall in tourism and travel in the wake of the latest outbreak of terrorism and the resulting fear of future violence.
The dollar fell across the board, losing 1 per cent against the euro, while prices of US bonds rose and gold futures in New York hit a two-month high.
However, the oil price fell as leading members of the producers' cartel Opec signalled they would step back from their promise to cut production next month. Venezuela and Qatar said surging prices, which recently hit $38 a barrel in the US, meant Opec needed to "stabilise" the price.
Julian Lee, an analyst at the Centre for Global Energy Studies, said strong demand and low stocks meant the market was much tighter than some had anticipated. "Opec is increasingly aware that the world needs more oil than they would have given if they were prepared to implement the output cuts."
Analysts said the stock markets were also weighed down by concerns about political instability in Taiwan and weekend reports that the UK would not be able to deter a terrorist attack on British soil.
Economists said yesterday's falls simply extended a recent run of declines on stock markets. "Something wider is going on as well," Mr Batty said. "People have become a bit scared that the momentum is leaving the equity markets and things are slowing in the global economy."
He said a vacuum of hard economic and business news was allowing speculation to fester ahead of the second quarter corporate earnings season in the US. He added that he expected the US corporate sector to deliver positive news next month, which would bring the recent sell-off on the stock markets to a halt. Mr Batstone concurred, commenting: "It is a buying opportunity but not yet."
Economists in the UK are waiting for testimony from Mervyn King, the Governor of the Bank of England, and several members of the Monetary Policy Committee, to give clues as to the timing of the next interest rate rise.
George Buckley at Deutsche Bank said: "If the committee is going to signal the risks for an early tightening this is a clear opportunity to do so."Reuse content