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Worst quarter since Lehmans for Europe's stock markets

Sean Farrell
Saturday 01 October 2011 00:00 BST
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European shares have suffered their biggest quarterly fall since the collapse of Lehman Brothers, driven by fears over the eurozone debt crisis and by slowing global growth.

World stocks fell as the market set aside Thursday's brief respite to end a turbulent third quarter on a grim note.

The pan-European FTSEurofirst 300 index closed down 1.6 per cent at 918.44 and 17.3 per cent lower for the quarter. The drop was the worst since the final three months of 2008 when Lehman's bankruptcy triggered the worst recession since the 1930s.

Britain's FTSE 100 index had its worst quarterly drop since the third quarter of 2002, dropping by 13.7 per cent to 5,128.48 in the fourth-worst period on record and losing a total of £212bn in value.

Louise Cooper, a markets analyst at BGC Partners, said: "A perfect storm of appalling bad news has driven prices lower – inadequate policy response, fears of a recession, and the intensification of the sovereign debt crisis."

The eurozone's woes worsened yesterday when figures revealed a jump in inflation to a three-year high last month. The unexpected rise to 3 per cent restricts the European Central Bank's room to cut interest rates amid stalling economic growth.

The euro slipped against the US dollar and was on course for its biggest monthly drop in nearly a year, weighed down by lack of decisive action on the region's debt crisis.

The single currency fell to lows at $1.34263 and was down 1.1 percent in late afternoon trading. September's fall of 6.6 per cent was the euro's weakest showing since November 2010.

European shares and the single currency were boosted on Thursday by Germany's approval of new powers for the eurozone bailout fund. However, data yesterday showed German retail sales in August dropping at their fastest in more than four years.

Chinese manufacturing contracted in August for the third straight month, suggesting Asia's growth engine was slowing and the world economy was weakening sharply. Gold, a safe haven, rose more than 1 per cent and had its biggest quarterly gain this year.

Markets gyrated in September as traders veered between preparing for a Greek debt default and hoping that the eurozone's major powers would act to stave off disaster.

The Chicago Board Options Exchange's Vix index, or "fear gauge", which measures volatility in equity markets, has surged as investors have rushed to protect investments.

The barrage of gloomy market news came as Goldman Sachs' economists warned of a "Great Stagnation" unless action is taken to boost growth.

Jose Ursua, a Goldman Sachs economist in New York, wrote: "The prospect of a long period of stagnant growth is a plausible risk for the major developed economies." He continued: "Whether these countries manage to avoid a 'Great Stagnation' by a pick-up in the recovery is likely to depend on policy being able to restore 'confidence and putting in place reforms that can decisively jolt growth."

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