Renewed bear market fears as stocks plunge

Asian worries wipe pounds 22bn off London shares as Wall Street takes a fresh battering
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STOCK MARKETS plunged around the world yesterday, sparking concerns that the markets could be at the beginning of a sustained bear run for the first time since the early 1990s.

Concerns over currency devaluations in Asia were cited as the key reasons behind yesterday's falls, which saw the FTSE close at its lowest level for over six months. All the major European bourses fell, trading was suspended in Moscow following sharp share price falls, and, in the US, the Dow Jones Industrial Average was down 209.6 points at 8365.27 in midday trading, contributing to the negative global sentiment. [PLS UPDATE]

There was continued gloom in Asia, where share prices in Hong Kong hit a five year low as worries over the local currency added to an already depressed mood. In Japan, the Nikkei 225 fell by almost 220 points to close at 15,406.99 after Japanese officials admitted that the country's recession was deepening. The yen hit a eight year low against the dollar, breaching the critical 147 barrier. The renewed bout of weakness in the yen has increased the risk of a devaluation of the Chinese yuan, traders said. Meanwhile in Indonesia, fears of a sovereign debt default grew, after the markets learned that the country was rescheduling its debt.

In London, the FTSE closed down 154.8 points at 5432.8, having been as much as 184 points down earlier in the day. The slide in the equity index started as soon as the London market opened for business, with dealers saying they were spooked by the losses in Asia overnight. The FTSE fell steadily throughout the morning, but was later buoyed by news that BP and Amoco, the oil giants, intended to merge, and the index was trading down105 points just prior to Wall Street's opening.

However, the merger news provided only a temporary respite. The weak start on Wall Street damaged sentiment, and the FTSE fell again during late afternoon trade. The FTSE is now more than 10 per cent lower than the record highs seen last month, but still around 5 per cent up on the start of the year.

A similar stock market pattern was played out across Europe. The Irish share index fell by more than 2.5 percent, hitting its lowest level since early March. Germany's DAX ended almost four percent lower, and Russia's leading share index touched levels not seen since May 1996. Investor sentiment in Latin America was also hit, as dealers speculated that the Asian gloom could spread to all emerging markets. The Mexican peso slipped more than 1 per cent to a record low of 9.21 pesos to the dollar.

"There are all sorts of worries about Asia, more worries about Russia and a global economic slowdown at a time when inflation is already very low." said Stefan Bergheim, economist at Merrill Lynch in Frankfurt.

In Japan, meanwhile, the Economic Planning Agency (EPA) said the economy was in "an extremely difficult situation" and is slowing. Taichi Sakaiya, the EPA's new head, said the EPA's report represented a "downgrade" to the Japanese economy. In Hong Kong, the blue chip Hang Seng Index fell 3.6 per cent to close at 6,780 points, below the level many market makers had suggested that support would kick in.

There was evidence of continued speculative pressure on the Hong Kong dollar, reflected in another rise in three month interbank rates which went to 12 per cent yesterday, as opposed to 11 per cent on Monday. Traders are becoming increasingly convinced that a devaluation in the yuan is a real possibility, and if the yuan falls, the market consensus is that the Hong Kong dollar peg will go too.

Traders in Shanghai yesterday supported heavy selling pressure on the yuan, which fell to a near five year low on the black market. Liu Mingkang, the deputy governor of China's central bank, warned speculators not to underestimate Peking's determination to defend its currency.

Analysts were cautious in assessing the longer-term implications of yesterday's developments. Only a handful felt the current stock market correction would turn into a sustained bear run - a long period of falling share prices.

"I don't think it's terminal, but I don't think it's over yet." said Richard Davidson, strategist at Morgan Stanley Dean Witter in London.

Khuram Chaudhry, UK strategist at Merrill Lynch, said: "Our view is that we're not really on the edge of a bear market. There is poor sentiment and a poor global backdrop. But the fundamentals are sound."

Matt Dennis at ABN Amro was also of the opinion that the latest round of jitters represented a stock market correction rather than the beginning of a prolonged bear run. This was largely down to concerns over earnings, and earnings concerns have not, historically, been sufficient to lead to a sustained bear run.

However, strategists at ABN Amro noted that some bear market warning signals have begun to appear. Yesterday, the FTSE 100 broke through its 200 day moving average, a measure seen by some as one bear indicator.

Although it may be premature to say a bear run is a certainty, the risks are certainly rising.