Worst hit were interest rate- sensitive stocks like the banks and companies with large shareholder bases in the US such as BP, Glaxo Wellcome and SmithKline Beecham. One analyst in London said: "The perception that the Fed only has to make one interest rate rise has eroded. It will take its toll all over the world."
There was little respite for Wall Street from its current fit of interest rate jitters as new figures from the US government suggested a new and potentially worrying upward spike in wholesale prices. The data sent the Dow Jones industrial average crashing to its eighth-steepest points loss, wiping out the remainder of its partial recovery from its recent steep decline. The index has retreated by more than 9 per cent since its all-time high of early March.
At the close of trading in New York the index was down 148.36 points at 6391.69. It was a similarly doleful story on the Nasdaq exchange which was off by some 29 points. On the bond market, meanwhile, the yields continued to push upwards.
Behind the renewed anxiety were the wholesale price figures issued by the Labor Department. It said that the producer price index (PPI) for March fell by 0.1 per cent, following even larger drops in February and January. This, on the face of it, was good news for investors.
Of more concern, however, was the secondary "core rate" figure that shows price movements with the volatile sectors of energy and food excluded. The core rate shot up an unexpected 0.4 per cent in March - the biggest jump in 14 months.
The news rekindled investors' fears of signs of a return of inflation to the US economy and the likely consequence that further interest rate increases will be ordered by the Federal Reserve. Two weeks ago the Fed raised a key short-term rate by a quarter point in an effort to rein in the economy. Its next rate-setting meeting is in May.
"The PPI core rate was much higher than expected," said Melanie Hardy of Bear Stearns in New York.
The drop in the overall PPI figure was helped especially by the largest decline in US energy prices in six years.
The Commerce Department meanwhile said that retail sales in the US rose by only a modest 0.2 per cent in March. But it revised its February retail number from 0.8 to 1.5 per cent.
David Alger of Fred Alger Management in New York offered a dissenting view on interest rates. "It seems to me that the economy is now decelerating. I'm not sure that the Fed is going to raise rates in May and I think that the market is going to turn around and it's going to be just fine."
Brian Kinnerly of Unterberg Harris, meanwhile, said that even if two more interest rate increases were in the pipeline, they had largely already been factored in by investors.