Market rout worsens as rise in US jobless prompts fears of recession

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The Independent Online

Billions of pounds were wiped off the London stock market yesterday, bringing to a close one of the worst weeks for British business in recent history. An unexpected surge in US unemployment last month triggered fears that the world's largest economy was on the brink of a recession that would spread across the Atlantic.

The rise in the joblessness figure was greater than Wall Street had expected and the Dow Jones plunged on the news, losing nearly 280 points, or 3 per cent. In London the FTSE 100 slumped 134 points, or 2.6 per cent, to close at 5,070. This followed Thursday's 111-point fall and means the index has lost more than 300 points – or some £75bn – this week.

City analysts believe the FTSE 100 could fall as low as 4,800, taking it within sight of its level when Labour first came to power in 1997. "Looking back on it, the week had a crisis feel," said Mike Lenhoff, chief portfolio strategist at stockbrokers Gerrard. "The risk is that the FTSE could test 5,000."

Economic data over the week indicated a sharper than expected slowdown. Industrial production suffered its worst fall for a decade in July with the hi-tech sector enduring its deepest slump since records began in 1968.

The purchasing managers' survey of manufacturing showed a fall while the equivalent survey for services showed the first drop in new orders for more than two years.

Meanwhile, the telecom giant Marconi issued a profits warning, dispensed with its chairman, chief executive and 2,000 other workers. Its shares plunged to a two-decade low and its debt was given "junk bond" status.

Ray Attrill, director of research at the online analysts 4cast that sees 4,880 as a key test for the FTSE, said market confidence had evaporated over the last 48 hours.

"The markets have been rattled by the jump in US unemployment in terms of its psychological impact on consumer spending, which holds the key to the US making a meaningful recovery," he said.

The US Labor Department said firms axed 113,000 jobs in August. That sent the jobless rate surging to 4.9 per cent, up from 4.5 per cent in July and the highest since September 1997.

"It builds the story towards a recession," said Mike Niemira, economist at Bank of Tokyo/Mitsubishi. These fears undermined the dollar. Against the euro it fell to 90.25 cents from 89.57 on Thursday. The pound rose to a six-month high against the dollar, hitting $1.4632, its highest since 13 March. The gloom raised hopes central banks on both sides of the Atlantic would cut interest rates next month. A growing number of analysts expect the Federal Reserve to trim rates at its meeting on October 2. In London Mr Attrill said the money markets were pricing in cuts by the Bank of England of between 0.25 and 0.5 per cent.

"The Bank has proved to be hugely sensitive to the global backdrop and it raises the chances of a rate cut as soon as October," he said.

Gerrard's Mr Lenhoff struck a positive note, saying the unemployment figures showed the corporate sector was going through a "healthy and necessary" adjustment ahead of recovery. "This may well be the selling climax that brings to an end the bearish phase of the past year – the final plunge below critical support levels, the beginning of the end for the bears," he said.

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