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Volatility sweeps global markets

BBC | July 27, 2007

European shares wobbled on Friday after earlier sharp falls in world stock markets, prompted by worries over higher interest rate levels.

In London, the FTSE 100 rebounded into positive territory, but then fell back into the red by early afternoon.

World markets had plunged Thursday, hit by concerns that higher interest rates will hit profits and takeover deals.

UK shares fell 3.2% on that day - the biggest one-day percentage loss since 2002, and US stocks were down 2.3%.

Analysts had predicted a further dip when UK trading resumed, but said that because most of the year's gains had been wiped out in one day, the market was now undervalued.

Worrying conditions

On Friday, the FTSE 100 was trading down 46.6 points, 0.75% at 6,204 by 1230 BST, after earlier recovering from an initial fall of 0.9%.

France's Cac-40 index of leading shares was down 1.1%, while Germany's Dax share index was down 1%.

In Asia, the Wall Street slump on Thursday led to Japan's Nikkei average closing down 418.28 points, or 2.4%, at 17,283.81, while Hong Kong's index ended 2.7% lower.

This followed New York's Dow Jones Industrial Average closing down 311.5 points, or 2.3%, at 13,473.57.

Analysts and investors have been warning that a number of factors are combining to create worrying conditions for the world economy.

Rising interest rates have also meant that the age of cheap cash has come to an end, with central banks worldwide, including the Bank of England, raising their rates to slow stubbornly high inflation.

At the same time, oil prices have climbed, raising fears that inflation could also pick up again because of higher energy costs.

Credit crunch

A tightening of availability of credit is behind much of the market uncertainty, observers say.

The rise in share prices in the past year has been largely driven by the takeover boom, with private equity bidders pushing up the value of the firms they are targeting.

Most of these deals are paid for with borrowed money and the banks who have loaned this cash have been laying off a large proportion of the loans by selling them to other investors.

However because investors are bruised by their losses in the US sub-prime mortgage market, they are now less keen now on buying the risky loans from the banks, taking away the credit needed for takeovers and prompting share prices to fall.

Within the stock markets, bonds have rallied, with investors looking for assets that could guarantee them steady, and relatively safe returns.

"You have a classic flight-to-quality rally," said Dean Junkans of Wells Fargo Private Bank, adding that markets outside of bonds were "finally appreciating risk".

There are also fear that a rise in defaults on US sub-prime mortgages may lead to a wider problem, said Robert Parkes, UK equity strategist at HSBC.

"People are concerned about what might happen rather than what is happening."


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