Gold broke through the $1,000 an ounce mark for the first time, while oil crested a record $111 a barrel as the weak dollar combined with more fundamental factors to push commodity prices higher.
Reversing two days of gains after the co-ordinated action by global central banks to ease the credit crisis, the UK's blue-chip FTSE 100 index lost 1.5 per cent, or 84 points, to close at 5,692.4. In New York, the Standard & Poor's 500 index dropped 1.7 per cent within minutes of the opening bell, and the Dow Jones industrial average was down by more than 200 points.
Trading was dominated by renewed fears about the perils of a collapse in the value of the dollar and the ever-dimmer prospects for growth in the world's largest economy.
Gold is seen as a safe hedge against rising global inflation and weaker equities, and trading in it has greatly expanded since the advent of exchange traded funds (ETFs). It is favoured in Asia, especially India, and the Middle East. The World Gold Council reports that the value of ETFs traded in London rose by 552 per cent and a further 105 per cent respectively in the third and fourth quarters of last year, a measure of the funds flowing into the yellow metal. For the past few months, investors have been favouring gold and other commodities over equities and the dollar as economic fears intensify.
Against other currencies, the dollar fell to an eight-year low against the yen, down to ¥100 to the dollar again, and the euro registered yet another record high. The pound, which has been depreciating steadily since last autumn, was up against the dollar at $2.0332.
The shock to the markets came with the release of the official US retail sales figures for February. Last month, sales shrank by 0.6 per cent on their January levels, well below the modest 0.2 per cent increase anticipated by traders. Previous data was also adjusted downwards, with car sales slumping 2.2 per cent on the month. Sales of gasoline and home-related spending were also notably lower.
Meanwhile, the US Labour Department said that jobless figures climbed to a two-and-a-half-year high, at 2.8 million in the last week of February, the highest since September 2005. Import prices jumped 13.6 per cent on the year, a combination of high oil, commodity and food prices and the lower external value of the dollar, which will also diminish the spending power of US households.
"No wonder the consumer stopped spending," said Chris Rupkey, senior financial eco-nomist at Bank of Tokyo-Mitsubishi. "Confidence is at recession-type lows."
And, in further confirmation that there is no end in sight for the US housing slump, home foreclosure filings jumped 60 per cent and bank seizures more than doubled in February as rates on adjustable mortgages rose and property owners were unable to sell or refinance as prices went into freefall. More than 223,000 properties were in some stage of default, or one in every 557 US households, according to RealtyTrac, which gathers default data. The highest rates are in Nevada, California and Florida.
"This is continuing to worsen," Susan Wachter, professor of real estate at the University of Pennsylvania's Wharton School in Philadelphia, said in an interview. "It tells us that we are not at a bottom."
Property prices fell by 8.9 per cent in the fourth quarter of 2007, according to the S&P/Case-Shiller home price index. The uncomfortable fact is that the US sub-prime crisis has spread to the prime market.
Rick Sharga, executive vice-president of RealtyTrac, said that foreclosure filings are likely to be "explosive" in May and June, raising the possibility that America will see 1 million bank repossessions in 2008. "We're in a vicious cycle," Mr Sharga said. "Even people who want to buy a home now are having trouble getting a mortgage."
Given that the US economy grew by a mere 0.6 per cent in the last quarter of 2007, and that even that barely positive reading was down to the relative health of US exports, aided by the weak dollar, most economists believe that, in terms of domestic demand, the US is already in recession, as acknowledged recently by that doyen of American investing, Warren Buffett. Barney Frank, the House Financial Services Committee chairman, and Christopher Dodd, the Senate Banking Committee chairman, also said yesterday that the US is in a recession, and unveiled plans to increase government efforts to prevent foreclosures amid the worst housing slump in a quarter of a century. Economists are predicting the weakest pace of consumer spending since 1991 in 2008.
Wall Street was only steadied by widespread speculation that the Fed will cut interest rates again on Tuesday, possibly by 0.75 percentage points to 2.25 per cent – on top of the 1.25 percenatge points of cuts already made since January. More cheer came from an announcement by Standard & Poor's that the worst is over: "The positive news is that, in our opinion, the global financial sector appears to have already disclosed the majority of valuation writedowns of sub-prime asset-backed securities."
S&P says that global writedowns linked to the US sub-prime crisis could reach $285bn (£140bn), $20bn more than expect-ed earlier this year. But there is scope for worse losses: encouraged by low interest rates and rising housing prices, and with a degree of mis-selling, banks and other financial institutions granted about $1.2 trillion of sub-prime, or risky, loans in the United States between 2005 and 2007.
In New York, the Dow Jones closed up 35.5 points, or 0.3 per cent, at 12,145.7, while the S&P rose 0.5 per cent to 1,315.5.
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