Markets routed in global sell-off

By Chris Giles in London, Michael Mackenzie in New York, John Aglionby in Jakarta, and Alan Beattie in Washington

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Stock prices collapsed around the world on Monday amid growing fears that the credit crisis would trigger a global recession. The wave of selling swept through markets despite a scramble by governments to tackle the crisis, leading to speculation about co-ordinated emergency rate cuts by the Federal Reserve and other central banks.

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The FTSE Eurofirst 300 index had its third worst day ever, plunging 7.75 per cent, while in France the CAC 40 slumped to its second worst day on record and the FTSE 100 in London suffered its biggest one-day points loss ever. The Dow Jones Industrial Average was down as much as 7.75 per cent, at 9,525.32 – falling below the 10,000 mark for the first time since October 2004 – before closing down 3.6 per cent at 9,955.00.

“There is a need for confidence in solvency and liquidity [in banks] but there is a lack of trust,” said Mark Kiesel, portfolio manager at Pimco. “People are far too hesitant to take risk and stocks are reacting to the outlook that as leverage is reduced, return on equity will be much lower.”

Emerging markets were particularly hard hit. The MSCI Emerging Markets Index slumped 11 per cent, its largest daily decline since 1987. Trading was temporarily stopped in some major emerging economies, including Russia, where the market fell by just over 19 per cent, and Brazil, where stocks fell as much as 15 per cent.

“This has been the biggest day so far for the capitulation of the long emerging markets trade, which has been in the works for weeks,” said Alan Ruskin, chief international strategist at RBS Greenwich Capital.

Robert Zoellick, president of the World Bank, said the crisis in Europe and the US could prove a “tipping point” for many developing countries as falling exports and worsening credit conditions triggered business failures and banking emergencies.

The falls came despite a rash of government initiatives around the world, which seemed to have no positive effect on confidence, leaving investors to rush to the safety of government bonds.

European equities were pummelled as investors took no comfort from grand statements from the continent’s leaders at the weekend promising a co-ordinated approach and followed by individual actions. Across Europe, governments followed Germany’s weekend move to guarantee retail savers’ deposits, with similar steps taken in Denmark, Sweden and Austria.

In Latin America, equity markets headed for their worst day since the 1998 Russia crisis, hit by falling world raw materials prices and a stampede into US safe-haven bonds. Earlier in Asia, Japan’s benchmark Nikkei 225 index plunged 4.3 per cent to a 4½-year low, while other markets such as Jakarta suffered a 10 per cent drop on the day.

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