US credit wobble sends tremors through global markets

Global stock markets plunged again yesterday, as investors feared a credit crunch in the US will end the mergers and acquisitions boom that has propelled shares to record or near-record highs.

The Dow Jones Industrial Average, which measures US equities, suffered a last-minute tumble as traders dumped stock. The sheer volatility of markets in the past few days left investors keen to avoid holding risky assets over the weekend.

Around the world, most markets ended further in the red, extending a sell-off that began earlier in the week in the US and which included the FTSE 100's biggest one-day fall in four years on Thursday. The UK's benchmark index fell another 36 points to 6,215.2, meaning it lost 6 per cent of its value this week.

The French and German markets also lost more ground. And in Asia, the Japanese and Hong Kong markets were off 2.4 per cent and 2.8 per cent respectively.

Although some reassuring economic figures prompted a solid start to trading in the US, by lunchtime the Dow was swinging wildly, and the late sell-off left it at 13,265.5, down 208.1. The losses came on top of a 311-point fall on Thursday, capping its worst week for five years.

Rising numbers of mortgage defaults have led to a crisis of confidence in the debt market, which has begun spilling over into the equity markets. Lenders are demanding much tougher terms from all sorts of borrowers, including private equity firms looking for cash for takeover bids.

"We've had this massive change in investor expectations in terms of new deal flow," said Fred Dickson, market strategist at DA Davidson & Co in Oregon. After a "tidal wave" of takeovers that pushed the Dow over 14,000 last week, investors are "now afraid of whose deal isn't going to be financed," he said.

The markets were further spooked by reports that another hedge fund, Sowood Capital, run by a hedge fund industry doyen, Jeffrey Larson, has taken a bath in bond markets and has lost more than 10 per cent of its value in the past few weeks.

Hank Paulson, the US Treasury secretary, tried to shore up confidence, telling CNBC television that the economy was moving to a sustainable pace of growth and the risks in the sub-prime mortgages market were "largely contained".

The latest US GDP figures showed economic growth rebounded during the second quarter to its strongest pace since the beginning of last year, thanks to a surge in business investment, more government spending and a better trade performance. The annualised growth rate of 3.4 per cent beat Wall Street expectations and compared to just 0.6 per cent in the first quarter. There was also better news on inflation, with the core measure watched by the Federal Reserve - which excludes volatile food and energy prices - coming in at 1.4 per cent, the lowest for four years.