Fears of more writedowns hit markets

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Citigroup's miserable financial results and an unexpected decline in US retail sales sent shares plunging on both sides of the Atlantic yesterday.

Growing recession fears sent the FTSE 100 down more than 3 per cent, 190.1 points, to close at 6025.6; the lowest level since the sell-off after the collapse of Northern Rock last year. The index is down over 6 per cent since the turn of the year.

Meanwhile, the Dow Jones Industrial Average of US blue-chips sank 277.04 to 12,501.11, erasing all the previous day's gains and then some.

Nick Brown, sales trader at Evolution Securities, said: "Citibank's results have shaken the markets badly today, and there are rumours of some even uglier numbers to come."

While many investors had hoped that Citi's write-offs would set a low-water mark for bank earnings, the eventual figure of $18.1bn was not enough to persuade people that the worst of the losses on mortgage-related derivatives are over.

Of the UK-listed banks, Royal Bank of Scotland was worst hit yesterday, falling 5.9 per cent to 392p. HSBC fell 4.8 per cent to 772.5p.

Khuram Chaudhry, European equity strategist at Merrill Lynch, said: "The fourth quarter was always going to be bad for financial groups, but they are posting some big numbers in write-downs now. The UK has similar problems to the US. The financial sector is vulnerable and there could be some nasty surprises coming up."

Wall Street banks are scaling back their operations now that the credit crisis has all but wiped out demand for many exotic mortgage-backed products. Soon after Citi said it would cut thousands of jobs, Bank of America said it was cutting 650 jobs on top of 500 that went when its investment banking business went into the red last autumn.

The next Wall Street grandees to report earnings are JPMorgan Chase today and Merrill Lynch tomorrow, and traders' nervesare frayed.

Those fears were heightened by the deteriorating credit quality of Citi's consumer lending operations, combined with a 0.4 per cent decline in retail sales in December, which suggested that the US consumer could lead the country into recession. Economists had been expecting a 0.1 per cent rise. The figures for October and November were revised downwards, making retail sales growth for 2007 as a whole the weakest since 2002.