Recession fears cause havoc on world markets

Jitters began when Morgan Stanley warned the US and eurozone were 'hovering dangerously close to recession' and it wouldn't take much to tip the balance

World markets collapsed last night, with investors bolting for cover on fears that the US and the eurozone were "dangerously close to recession".

More than £62bn was wiped off the blue chip FTSE 100 index, which slumped by 239.37 to 5092.23 – its worst one-day fall in points terms since November 2008. In percentage terms, the index endured its darkest session since March 2009. European shares fared no better, putting in their worst daily performance since the credit crunch as growth concerns supplemented existing worries about the eurozone's sovereign debt crisis.

The Spanish stock market was down nearly 5 per cent, France by 5.5 per cent, Germany by 6 per cent and Italy by more than 6 per cent. On Wall Street, the Dow Jones average closed 419.63 points, or 3.68 per cent, lower at 10,990.58, while the Standard & Poor's 500 Index fell 4.46 per cent to 1,140.65. The Nasdaq Composite Index dropped 5.22 per cent to 2,380.43.

The jitters began as traders learned that Morgan Stanley had cut its global growth forecast for this year to 3.9 per cent from 4.2 per cent. Striking fear into the heart of investors was the bank's view that, as the world slowed, the US and the eurozone were "hovering dangerously close to recession".

Although their predictions still anticipate growth, with the US expected to expand by 1.8 per cent this year and the eurozone expected to grow by 1.7 per cent, they warned that "it won't take much in the form of additional shocks to tip the balance".

"The main reasons for our growth downgrade, apart from disappointing incoming data, are recent policy errors in the US and Europe, plus the prospect of further fiscal tightening there in 2012," they said, singling out "Europe's slow and insufficient response to the sovereign crisis and the drama around the lifting of the US debt ceiling" for special mention.

The bears did not have to look far for evidence to back up the fears of a dreaded double dip in the world's largest economy. Although the weakness in New York may have been exacerbated by technical factors, sellers found enough fodder in some disappointing economic data out of the US.

First, the US Labor Department said new claims for unemployment benefits had climbed by a higher than expected 9,000 to 408,000 last week.

That was followed up by the news that the Federal Reserve Bank of Philadelphia's index of business conditions in the mid-Atlantic region had plummeted to minus 30.7 in August, down from a positive reading of 3.2 in July, and well below expectations of 3.7. The headline reading takes the index back to levels last seen before the post-financial crisis recession in the US ended in 2009. The flipside of the equity market rout was the scramble into safe havens, chiefly US government debt. The 10-year Treasury note, the most liquid bond in the world, soared in value, pushing the interest rate on that note to below 2 per cent for the first time in history.

Treasuries are even more popular than at the peak of the credit crisis in 2008 – an irony that will not be lost on Standard & Poor's, the agency whose downgrade of the US Government's credit rating earlier this month appears to have been largely ignored.

Similarly, the interest rate on 10-year UK debt, or gilts, fell to an all time low of 2.238 per cent. German debt also saw influx of investors, while gold, the another sought-after haven in times of economic stress, spiked to as much as $1,825.99, the latest in a series of record highs.