Dow falls below 10,000 as rate rise fears send global market plunging

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Stock markets tumbled across the world yesterday as worries over higher interest rates and oil prices triggered fears the global economy could head back into recession.

Stock markets tumbled across the world yesterday as worries over higher interest rates and oil prices triggered fears the global economy could head back into recession.

The benchmark Dow Jones index of US shares closed below the 10,000 mark for the first time this year, ending down 127 at 9,990 after plunging as much as 184 points in late trade.

The global sell-off had begun on Friday night after a large increase in US employment boosted speculation the Federal Reserve could raise rates as soon as next month.

Forecasts of a sharp hike in rates sparked a rise in both the dollar and bond yields ­ adding to gloom on Wall Street over the impact on corporate profits.

Oil prices contributed to the retreat on Friday as US crude for June delivery hit $40 a barrel, the highest price since Iraq invaded Kuwait in 1990. "Oil prices at $50 would tip us into a world recession," warned Andrew Oswald, professor of economics at Warwick University.

A dramatic intervention by Saudi Arabia, which urged its fellow members of the oil producers' cartel Opec to pump more oil, sent the oil price tumbling yesterday, but only added to fears that the recent rise in energy costs could curb growth.

The combined effect sent the Japanese market crashing almost 5 per cent as the yen plunged against a rampant dollar. This in turn sparked a fall across European markets. "This is the correction we have been fearing for some time," one analyst said.

Britain's leading share index fell below 4,400 for the first time in five weeks, eventually closing down 103 points, or 2.3 per cent, at 4,395. All major European markets lost more than 2 per cent.

Analysts said the world was set for a slowdown that would slam the brakes on the recovery in share prices that began with the collapse of Saddam Hussein's regime a year ago.

Central bankers from the world's leading economies moved to calm the markets yesterday, saying soaring commodity prices and rising bond yields were not threatening global recovery.

The Group of 10 ­ which includes the US, the UK, Japan and Germany ­ said it was optimistic the world economic recovery was broadening but hinted its members stood ready to raise interest rates to tackle inflation.

"Steady growth at this stage is not hampered by a rise in oil prices even if we have to remain vigilant in this respect," said Jean-Claude Trichet, the president of the European Central Bank who chaired the G10 meetings.

Economists said world share prices would come under continued pressure from higher inflation, interest rates and oil prices. Stephen Lewis, chief economist at Monument Securities, said the recruitment drive in the US would end the surge in productivity that had helped drive corporate profits over the past year.

"As productivity growth reverts to normal rates, more of the growth in national income is likely to accrue to labour and correspondingly less to capital," he said. "That bodes ill for corporate profits going forward."

James Knightley, an economist at ING Financial Markets, said the markets were still suffering a hangover from Friday's employment data.

"We have seen some of the big Wall Street names reassessing their calls on the Fed and people are now looking to the US inflation figures later this week that will be the key driver for markets," he said.

Saudi Arabia's extraordinary intervention triggered a sharp drop in global crude prices, which fell as much as $1.50 a barrel before ending at $38.97 in New York. Brent crude fell $1.03 to close at $36.97.

However, analysts said the move had come too late to offset the harmful effect a sustained high oil price had had on consumers and businesses in the US. The Saudi Oil Minister Ali al-Naimi said a 6 per cent increase in output by Opec countries was "essential" to balance global supply and demand.

"We do not want to see prices rise to the level that they negatively affect the growth of the international economy or the demand for oil," he said.