Fears of war in Iraq and weak economies deal double whammy to global markets

Stock markets in London and New York ended their third consecutive week in the red yesterday, as fears over the strength of economic recovery added to mounting tension around a war with Iraq.

Stock markets in London and New York ended their third consecutive week in the red yesterday, as fears over the strength of economic recovery added to mounting tension around a war with Iraq.

Weak economic data and a severe profits warning from Lucent Technologies, the US's largest telephone maker, triggered a nosedive on Wall Street and in the City.

In London the FTSE 100 came within a whisker of the key 4,000 mark, falling 76 points or 1.9 per cent, to 4,008. It had fallen as much as 148 points to 3,927, which traders believe would open up the path for another sharp drop to as low as 3,500.

The misery started when MobilCom, the German company, said it would file for insolvency. This triggered a drop in telecoms shares while banks were hit by worries over exposure to the debt-ridden telecoms sector.

Yesterday, the International Monetary Fund warned that European banks and insurers were at risk from their exposure to the fallout from the slump in telecoms, media and technology shares.

Stock markets across Europe dropped, with share indices in Frankfurt, Paris and Zurich all slumping more than 2 per cent. In Asia the Japanese market dropped 1.8 per cent.

The pain spread to America where industrial giants from the new and old economies issued severe profits warnings.

Lucent said its business was much worse than analysts had feared and more job cuts were likely as spending by telephone companies continues to deteriorate.

Honeywell, the industrial conglomerate, slashed its third-quarter and 2002 profit forecasts for the second time this year.

The blue-chip Dow Jones lost 67 points to close at 8,312.7, leaving the index down 1.4 per cent on the week.

Mounting fear of an imminent outbreak against Iraq also played a role in depressing confidence. Oil prices jumped sharply after Iraq rejected US demands to allow weapons inspectors into the Arab oil exporting country.

Brent crude oil for November delivery climbed 58 cents to end at $28.31 a barrel, while in New York US crude rose 96 cents to $29.81.

Meanwhile, Alvaro Silva, the secretary general of Opec, hinted that the oil cartel might not raise production next week to help bring down prices.

"The problem is not a shortage of oil," he told Reuters yesterday, adding that he was not concerned by rising prices.

On the economic front, another strong month of retail sales was offset by a fresh slump in consumer confidence.

Spending at US shops jumped 0.8 per cent last month, greater than analysts had forecast and after rises of 1.1 per cent in July and 1.4 per cent in June. But consumer sentiment fell for a fourth straight month in September, dropping to 86.2 from 87.6 according to the index from the University of Michigan survey.

"As long as consumers continue to spend, I'm not sure we should care whether they have a smile on their faces while they do so," Stephen Stanley, senior economist at Greenwich Capital Markets, said.

Optimism among consumers has fallen from a peak of 96.9 in May as scandals over corporate accounting and tensions over the Middle East have sapped confidence. The issue for economists is whether the upturn in the wider economy can take off before mounting pessimism finally saps the will of the average American to shop.

Ian Morris, US economist at HSBC, said that despite the fall-off in confidence, the Michigan index was still above its long-term average. "In other words, this level of confidence is still consistent with reasonable consumption," he said. "Consumer recessions tend to be associated with sub-70."