Metals and oils plummet amid US growth fears

Stock, metals and oil markets were locked in a vicious downward spiral yesterday amid growing fears of a sharp downturn in the American economy.

A knock-on effect on share prices from a sell-off in commodities worsened after a plunge in new US housebuilding projects revived fears of a slump in property prices in the world's largest economy.

In London, the FTSE 100 fell more than 1 per cent along with most Continental markets, while the Nasdaq index in New York was down 0.5 per cent. Losses on base metals prices also hit British mining shares with BHP Billiton, Rio Tinto and Xstrata all down between 4 and 6 per cent.

Stephen Lewis, at Insinger de Beaufort bank, said: "The weakness in oil futures, which seems to be spreading by contagion to other commodity markets, looks very much like the first episode in one of those chain collapses in asset values, which have been characteristic of market behaviour in recent years."

The falls came just a day after Sir John Gieve, deputy governor at the Bank of England, warned that a financial crisis in one region or country could spread through the rest of the world.

Oil prices suffered a second successive sell-off, plunging 2.5 per cent after Thursday's 4 per cent fall. Crude prices fell $1.40, or 2.5 per cent, to $54.86 a barrel, the lowest since June 2005.

The market was hit by a warm weather forecast for the US east coast, high US oil inventories and growing fears of an economic slowdown. This in turn triggered a sell-off in commodity markets on concern global demand for raw materials would also suffer.

This fear was heightened by news that builders started work on 1.49 million new homes in the year to October, down 15 per cent from September and the weakest since July 2000. Building permits fell 6.3 per cent, according to the Commerce Department.

The price of copper, which is used extensively by housebuilders for wiring, fell 2.2 per cent to $6,645 a tonne and down 25 per cent from its peak of $8,800 hit in May. Aluminium fell $93, or 3.5 per cent, to $2,575 a tonne. Zinc and lead each lost more than 5 per cent.

The fall in housing starts contributed to the fall in stock markets as analysts said it pointed to a sharper slowdown in the overall economy than has been factored in by the Federal Reserve.

James Knightley, UK economist at ING Financial Markets, said: "The outlook for house prices remains weak with further downward pressure in the coming months highly likely. This causes us concern with regard to the outlook for consumer spending, given the link with negative wealth effects and lower mortgage-equity withdrawal."

The dollar, which fell on the housing news, was also dragged down by rumours of trouble at a large US hedge fund, which was unwinding its bets on the dollar/yen exchange rate. By noon in New York, the dollar was down 0.5 per cent at ¥117.53, and 0.3 per cent against the euro.