Shares plunged around the world as the dollar recorded its steepest daily fall against the yen since 1971. Experienced dealers described conditions in the markets as the worst they had experienced.
The quarter-point cut in UK interest rates was widely seen by traders as "too little too late", and the FTSE 100 index dived 130 points to close at 4,698. Every major world market recorded a similar scale of loss. On Wall Street, the Dow Jones was more than 3 per cent down at 7,504. Nasdaq, the US hi-tech stock market, was 7 per cent down.
Among factors fuelling the market frenzy were:
r Disappointment that the quarter-point rate cut by the Bank of England was not bigger;
r Reports that New York-based Tiger Fund was having to liquidate positions wholesale to cover margin calls due on derivatives contracts, and of other smaller funds being late on margin calls. Tiger is the world's largest hedge fund with $20bn of capital;
r Rumours that continued losses at Long-Term Capital Management have used up a substantial proportion of the $3.75bn of new capital injected by the 14 banks, and that more money may now be needed;
r Fears of further big trading losses by investment banks - Salomon Smith Barney, whose merger with Citicorp was consummated yesterday, last night reported a net loss for the third quarter of $325m, including $700m bond arbitrage losses;
r Reports of credit lines to institutions judged to be high risk being cut.
The dollar fell from 111.16 to 123 yen at its worst. The central banks of Britain, Germany, the US and Japan were rumoured to be checking prices - the first stage towards active intervention in the currency markets.
Dealers said such volatility was "unprecedented", blaming the unwinding of dollar-yen positions by hedge funds. "It shows the power of the hedge funds," said Nic Stamenkovic at Bank Austria/ Creditanstalt Futures. "A few people have been hit for six. "
Some hedge funds have gambled large proportions of capital on the so- called yen carry trade. This involved borrowing in yen, taking advantage of the 0.25 per cent Japanese interest rate to fund speculative investment in US dollar bonds, particularly high-yielding ones.
Julian Robertson, who runs Tiger, told investors the fund lost 10 per cent of its value in September. An observer said that unless Mr Robertson had got out of his positions since then, he would now be facing losses of "$20bn or even $40bn".
A Tiger spokesman dismissed reports the fund was in difficulty or had failed to meet margin calls. "Tiger is operating normally," he said. He insisted that unlike LTCM, which was caught out by a sharp correction in bond markets, Tiger invests partly in shares and is only three times leveraged, against 40 times for LTCM.
Despite attempts to reassure the markets, it is still widely believed that there are two or three hedge funds in the $100m to $1bn category which may be about to go under.Reuse content