Catherine Boyle and Jane Macartney in Beijing
October 10, 2008

Panic shot through stock markets around the world today, suggesting that drastic actions by central banks have failed to calm investors.

The sell-off in stock markets worldwide came after after devastating falls on Wall Street yesterday.

London shares dropped below 4,000 for the first time in five years, and were down 325 to 3,988 at noon. The pound fell to $1.6909, its lowest level against the dollar since 2001, and was down 1.2 per cent against the euro.

The cost of banks borrowing money from each other also rose today in a sign that confidence has not returned, despite hundreds of billions of dollars being promised to bail out banks by governments around the world. The Libor rate for three-month interbank dollar loans rose by 0.3 per cent to 4.8 per cent.

Traders fear that the actions of governments and central banks around the world will not be enough to avert a severe global downturn.

Oil prices plummeted to a one-year low below $83 a barrel, sparked by fears that a severe global economic crisis would lead to less demand for energy. Some Opec members want to cut production at their November meeting to shore up prices.

Further sharp falls in the Dow Jones index are expected when the New York Stock Exchange opens later today.

Bank shares took the brunt of the pain as markets gyrated with Barclays off 15.6 per cent, and HSBC down 4.3 per cent. BP fell 8 per cent and Royal Dutch Shell was off 5.9 per cent as oil prices fell.

France’s CAC 40 and Germany’s Dax benchmark indices were both down more than 10 per cent.

The falls followed a further plunge in Japan’s Nikkei stock average, which dropped 9.6 per cent, its biggest one-day loss since the 1987 stock market crash, on growing fears that the financial crisis will spark a world recession. The index has fallen 24 per cent this week, more than double the weekly drop immediately after the 1987 market crash.

Russia, Austria and Indonesia suspended their stock exchanges for the day on fears that the panic would increase.

Indonesia announced that trading would be suspended indefinitely – after initially planning to reopen the market after a suspension imposed on Wednesday – to prevent deeper panic.

The sell-off came as Japan’s Yamato Life Insurance company, an unlisted insurer, collapsed with $2.7 billion in debt, although government ministers and analysts were quick to play down the risk of contagion.

However, fear reverberated across Asia and the selling was brutally swift with every market dropping hard at the opening, taking the MSCI index of Asia-Pacific stocks excluding Japan down 3.5 per cent to its lowest since June 2005.

The Indian stock market crashed nearly 10 per cent this morning as policymakers scrambled to avert a run on the rupee.

“This is a bloodbath. It is discomforting that global markets are not reacting to the measures regulators have taken,” Hiten Agrawal, head of research with Angel Broking in Bombay, said.

India’s central bank reacted to growing pressure on the country’s currency by slashing the proportion of cash banks are required to keep in reserve from 9 per cent to 7.5 per cent, which will release about £6 billion into the banking system.

The mood in markets took its tone from Wall Street where US stocks plummeted as investors bet recent worldwide moves to try to thaw frozen credit markets would be insufficient to avert a global recession. The Dow Jones industrial average closed down 7.3 per cent.

The bloodbath quickly spread. Sydney plunged 7.0 per cent, Seoul was down 7.5 per cent, Shanghai lost 3.8 per cent and Hong Kong plummeted 8 per cent.

Oh Hyun-Soek, at Samsung Securities, said: “It’s beyond panic. Concerns about the global economy are deepening further and there is no sign of easing in the global credit crunch.”

The fear was underlined with the cost of protection against defaults in Asia’s sovereign and corporate debt soaring to record highs.

Singapore shares dropped 7.3 per cent at the opening with the Straits Times Index down 76.2 points at 1,971.72 – its lowest since December 2004. South-East Asia’s largest bank, DBS Group, fell 7.6 per cent after government data showed the city state was now in recession.

The island’s economy shrank at a worse-than-expected annualised, seasonally adjusted rate of 6.4 per cent in the third quarter after declining 5.7 per cent in the previous three-month period, putting the economy into a technical recession.

But the hardest fall was in the region’s biggest market. Tokyo’s Nikkei average had sunk 10.6 per cent, or 974.12 points, to finish the morning session at 8,183.37. That surpasses a 9.4 per cent fall earlier in the week and would be the sharpest slide since a 14.9 per cent one-day plunged during the 1987 crash.

Kaoru Yosano, the Economics Minister, urged investors to reach calm judgments in the face of the tumbling markets, stressing that Japan’s regional banks were strong as a whole.

Australian shares dropped to fresh three-year lows with the benchmark S&P/ASX 200 index down 259.2 points at 4,061.7, its lowest since May 2005. Losses this week alone have already reached 15 per cent.

Even Australia’s well-capitalised banks were caught up in the downturn, being sold off sharply in line with their troubled international counterparts.

Lucinda Chan, client advisor at Macquarie, said: “These are massive, almost unheard of big days down. These plunges are deep and they hurt deeply. People’s nerves are really at the end of their tether. The contagion factor is certainly very clear.”

New Zealand’s benchmark NZX-50 index fell 115.6 points, or 3.9 per cent, to 2,828.5. So far this year it has fallen more than 28 per cent.

Hong Kong shares plunged 8.0 per cent in early trade, falling below 15,000 points for the first time in nearly three years. The benchmark blue chip Hang Seng index has fallen 1,211.48 points, or 7.6 per cent, to 14,731.76 minutes after trading started Friday. The index rose 3.3 per cent a day before.

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