FTSE 100 makes record leap

22 January 2008

The FTSE 100 closed 266.5 points up at 5875.80 on Thursday night, the largest rise ever recorded in a single day.

The leap follows a week of stockmarket turbulence across the world, brought on by fears of a recession in the US. The US Federal Reserve cut interest rates in response to falling shares on Wall Street.

The stockmarket closed at 5740.10 points on Tuesday night and continued to fall in the first few hours of trading on Wednesday. It closed slightly down at 5,609.3 points and crept up to 5,764.8 points in the first hours of Thursday.

The US Federal Reserve cut interest rates by 0.75% to 3.5%. Although the move caused shares on Wall Street to pick up slightly, the move failed to initially bolster indexes in the UK, France and Germany.

The collapse in global share prices is due to fears that the US is sliding into recession and worries about the stability of big financial institutions.

The Fed, the US central bank, cut rates because the of country's housing market slump and increased unemployment levels.

On Tuesday morning, before the cut, the FTSE 100 plunged by more than 200 points to 5,338 in the first few minutes of trading. This temporarily wiped a further £57 billion from the value of blue-chip stocks, following £77 billion loss on Monday.

Fortunately the FTSE had clambered out of bear market territory by 10.30am – but by just eight points to 5,586. By late afternoon this had risen to 5,737 points.

The panic also sent ripples through Asia where stockmarkets also had a bumpy ride throughout the night. Indian shares dropped by more than 11% as the market opened, resulting in a one-hour trading ban, and a further 13% drop when trading resumed.

Japan suffered one of the worst trading days in history over night at the start of the week, with the Nikkei – the Japanese index – dropping 5.7%. Prices in Hong Kong and South Korea also fell.

Wider economic concerns

On Tuesday night, the Bank of England’s governor Mervyn King warned the UK faces severe economic challenges over the next year.

He also hinted that the expected interest rate cut in February may not be forthcoming.

King said higher energy and food prices, as well as the lower exchange rate, could push inflation “significantly” beyond its 2% target this year – potentially even exceeding the 3% mark, beyond which King would have to write an open letter to the chancellor.

He added: “We are determined to keep inflation on track to meet the 2% target in the medium term.”

Should investors be worried?

Philip Pearson, partner at P&P Invest in Southampton, thinks not: “Dips in the stockmarket are normal and it’s nothing to be worried about.

“It is sales season, and in sales season shares sell at a discount. Shrewd investors will be buying stocks at a discount to sell at a premium later on.”

Mark Dampier, head of research at Hargreaves Lansdown, agrees: "There are some fantastic opportunities out there now.

"If you are invested for the long-term - say five or 10 years, then you need to filter out this short-term noise.

"In fact, if you are worrying, don't read the news and switch off the TV - there's an awful lot of emotive language being used that just isn't helpful."

However, Pearson adds that turbulent times like these serve to reinforce the importance of a diversified portfolio.

He says: “Many people may be realising the effect of having too many eggs in one basket now."

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