Recession fears prompt stockmarket falls
European stockmarkets have opened higher this morning in response to a rally on the US markets last night.
Despite the FTSE 100 closing 5% down yesterday at 3,861 points, the first hour of trading this morning has seen share prices rise a few percentage points. The Dax in Germany was up 2.8% on opening, while France's Cac was up 4%.
On Thursday, the Dow Jones experienced a later 4.7% rally while Tokyo's Nikkel was up 2.8%. The rises came a day after the Nikkei fell 11%, the Dow Jones experienced its worst one-day fall since October 1987, and the FTSE closed 7% down.
Earlier this week, President George Bush injected $250 billion into biggest banks on Wall Street, a move that sparked a rally on the global stockmarkets.
The latest unemployment figures in the UK and the worst retail figures on American high streets for three years, however, have virtually wiped out gains made as the threat of a world recession moved ever closer.
Crude oil prices have now hit a 13-month low at just over $73 a barrel.
In addition, the inter-bank lending rate (Libor) has still not fallen to more affordable levels, as a result of banks' persistent liquidity issues. Despite the Bank of England base rate currently standing at 4.5%, three-month Libor is well above 6%.
Simon Denham, managing director at Capital Spreads, explains: "It still does not really matter what the central banks do to the official rates or do in liquidity injection - banks are still wary of lending to each other."
Dehman says more countries need to guarantee 100% of all depositors' money - not just consumers but also local authorites and private institutions who have been stung by the collapse of Icelandic banks.
Until that happens, he warns, banks will not be willing to lend to each other again and stockmarkets, as well as economies, will continue their bumpy ride.
"We are now into the second phase of the market fall where fund liquidation will start to impact any potential rally and all ‘good’ news will be taken ‘badly’ and any ‘bad’ news will be taken even worse," he adds.
The London Inter-Bank Offer Rate is the rate at which banks lend to each other over the short term from overnight to five years. The LIBOR market enables banks to cover temporary shortages of capital by borrowing from banks with surpluses and vice versa and reduces the need for each bank to hold large quantities of liquid assets (cash), enabling it to release funds for more profitable lending. LIBOR rates are used to determine interest rates on many types of loan and credit products such as credit cards, adjustable rate mortgages and business loans.
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.