Bomb attacks trigger market turmoil

Fears for recovery: Middle East violence and surging oil price add to concerns over global outlook

Stock markets plunged across the world, the dollar fell sharply and the gold price surged yesterday as a string of bomb attacks and a record jump in the oil price stoked fresh worries that the global economy could head back into recession.

Stock markets plunged across the world, the dollar fell sharply and the gold price surged yesterday as a string of bomb attacks and a record jump in the oil price stoked fresh worries that the global economy could head back into recession.

The outbreak of violence, which included the assassination of the head of Iraq's Governing Council, sparked fears of an upsurge in terrorist activity. It also compounded fears that the West would be at the mercy of the Middle East if supplies of oil faced major disruption amid a period of soaring demand.

Stock markets, which have already suffered large losses on growing fears that interest rates are set to rise higher and more quickly than expected, took a severe beating. On Wall Street, the Dow Jones fell 105.99 pints, ending at a fresh low for the year below the key 10,000 level.

Izzedine Salim, the holder of the Governing Council's rotating presidency, was killed in a car-bomb attack on his four-vehicle convoy in Baghdad.

Meanwhile bombs damaged four branches of HSBC in Turkey just hours before Tony Blair arrived in the country for talks with the prime minister and president.

The oil price hit a fresh all-time high, reaching $41.85 a barrel in New York, having vaulted past the previous 1990 record of $41.15 on Friday.

"As the oil price moves steadily higher people are increasingly worried about the broader economic impact as it takes money out of consumers pockets in both Europe and the US," Jason James, the chief global strategist at HSBC, said.

Seven Investment Management said the rise in oil prices could knock at least 0.5 percentage point off global growth, which was "deeply unwelcome at a time when growth looks to be decelerating".

Rising oil prices are feeding through to steeper petrol prices and stoking speculation of renewed protests by hauliers and farmers in the UK. The Treasury yesterday continued to insist it would not react to short-term volatility.

Gold ­ traditionally seen as a safe haven in troubled times ­ posted its strongest rise for seven weeks, rising $5.20 or 1.4 per cent to $382.30 an ounce. Meanwhile the dollar slumped by more than a cent against the euro to $1.2016.

On top of this, traders had to absorb a slump in India's stock markets on fears that a new leftist-backed government would stall economic reforms.

Shares plunged 11 per cent as the Bombay stock exchange recorded the biggest intra-day drop in its 129-year history and trading was suspended twice during the day. India's central bank was forced to declare its readiness to provide liquidity to banks for meeting payment obligations, while the country's chief economic adviser urged the markets not to panic.

One London trader said: "The big fall has hit quite a lot of hedge funds which have been putting a lot of money into the subcontinent and Japan and they have been having a hard time."

According to rumours, one Wall Street fund manager had 40 per cent of its portfolio in non-Japan Asia ­ which makes up just 3 per cent of global stock market wealth. HSBC's Mr James said there had been a fundamental reassessment of Asia in the wake of growing worries about a Chinese bubble and the change of government in India.

"There are some very big bets on the long term structural story of tremendous growth in manufacturing in China and outsourcing in India," he said. "It is an unfortunate coincidence that both have started to unravel."

Japan's Nikkei average tumbled more than 3 per cent to close at 10,505, its lowest closing level since 12 February.

Share prices tumbled across Europe, with the FTSE 100 index of leading UK stocks losing 38 points or 0.8 per cent to close at 4,403.0 and many other indices down 1 per cent or more. In New York , the Dow Jones fell 105.99 to end at 9,906.91.

"The 'sell in May and go away' crowd are definitely here," one City broker said. "But a lot of stocks are looking oversold."