World markets take a tumble on fear of rising interest rates

Stock markets slumped across the globe yesterday as rising interest rates coupled with falling commodity prices to trigger a massive sell-off.

London shares suffered one of the sharpest falls among industrialised economies as investors took flight, sending the FTSE 100 down 143 points, or 2.5 per cent, to close at 5,562.9.

This left it just above the low for the year - the 5,532.7 figure the market closed at on 22 May and 9.3 per cent below the peak of 6,132.7 that was hit last month. In monetary terms, more than £35bn was wiped off the value of London shares.

After very weak trading overnight on the markets in South Korean and Japan, European markets followed suit as the European Central Bank increased interest rates by 0.25 per cent. The bank's move followed interest rate rises in India, South Korea, Turkey, Denmark and South Africa, as bankers moved to curb rising inflation.

Emerging markets were among the biggest casualties with South Africa tumbling almost 7 per cent, Argentina down 4 per cent and India almost 5 per cent lower.

Markets were also affected by geopolitical events, with the death of Abu Musab al-Zarqawi, the leader of al-Qa'ida in Iraq, in an air strike by the US sending the price of oil below $70 per barrel. Commodity traders had speculated that his death would lead to a calming of the situation in Iraq and fewer tensions in global energy markets.

Despite the news from Iraq, the Dow Jones in New York swiftly moved into triple-digit losses and the blue-chip index is likely to exert more pressure on London shares today.

After a three-year bull run that has seen many large commodity stocks treble in value, mining stocks were the worst hit in London yesterday, with most losing more than 5 per cent of their value. Rio Tinto, the world's second-largest integrated mining company, has now lost more than 22 per cent from its peak value of 3,322p. The Anglo-Australian group, BHP Billiton, the world's largest mining company by market capitalisation, has also fallen more than 22 per cent from its high.

Most stock market analysts describe a crash, in general terms, as a decline of more than 10 per cent. The London market has almost reached this, with its 9.3 per cent decline since hitting the 6,132.7 high in April. The market, with its large exposure to oil and mining stocks, has been hit harder than other major global indices.

Historical signs are not good for the coming weeks. During the World Cup in Japan in 2002, the London stock market fell 8.5 per cent, and with traders' minds potentially more concerned with the footballing events in Germany over the next few weeks, many observers are beginning to feel decidedly bearish on the outlook for the stock market.