Recession fears prompt stockmarket falls

16 October 2008

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.

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