Has US caught Europe’s cold? Poor jobs figures send markets plunging

Worldwide panic as Dow Jones suffers worst day of year and US unemployment leaps

Panic gripped global stock markets yesterday amid mounting signs that the world's two most powerful economies are succumbing to Europe's debt crisis.

Investors were spooked by the slowest growth for China's manufacturers in more than two years during May. The sell-off gathered pace after hugely disappointing figures from the US – the world's biggest economy – where employers added far fewer jobs than expected over the month.

In London, the benchmark FTSE 100 Index hit a new six-month low of 5260.19, wiping nearly £16bn off the value of the UK's biggest companies as investors flooded funds into safe-haven assets. BGC Partners analyst Michael Ingram said: "Things are not going according to plan. We have one engine on fire – the EU – another steadily winding down – China and much of the emerging markets – and now ominous clunking noises from the US engine."

After months of encouragement from the US jobs market, unemployment unexpectedly rose to 8.2 per cent last month. Companies added just 69,000 jobs last month, less than half the 150,000 expected. ETX Capital trader Richard Wiltshire said: "This serves to highlight just how vulnerable the employment situation actually is. The US economy may not accelerate as quickly as many thought or hoped."

The downbeat news came on the heels of a seventh month of contraction in a row for China's manufacturing sector during May. UK manufacturers also suffered the sharpest slump since the aftermath of the Lehman Brothers collapse in November 2008 as the eurozone uncertainty hit orders. Oil prices slid back below $100 a barrel for the first time since February 2011.

The stock market carnage wiped out all the gains for US stocks so far this year as New York's Dow Jones industrial average dipped 275 points in its worst day of 2012. Germany's Dax index shed 3.4 per cent while France's CAC40 dropped 2.2 per cent.

The fear was such that the investors were paying for the privilege of lending money to Germany for the first time in the clamour for shelter from the turmoil. Returns on Germany's two-year debt briefly turned negative as buyers were willing to pay more than the face value of bonds. Eric Wand, an analyst at Lloyds Bank corporate markets, said: "At the moment it's not so much about returns on capital but return of capital. It might make more sense to put your money in a bank, but which bank do you trust?"

The cost of UK and US government borrowing also plunged to all-time lows in contrast with beleaguered Spain, whose debt costs remain close to the 7 per cent mark seen as triggering a potential bailout. Germany agreed to allow Spain more time to cut its budget deficit this week, but Madrid and its ailing banks are seen as the biggest potential casualty of contagion from a Greek crash out of the eurozone. Unemployment across the 17 countries in the euro hit 11 per cent in April, the highest level since the single currency was introduced in 1999.

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