Inflation and credit fears send global markets into spin

Markets tumbled around the globe as the fallout from the credit crisis and rising inflation fears dented investor confidence. In Europe, stock markets closed sharply lower yesterday after heavy losses on Wall Street amid concerns there may be more bad news to come for the economy, and banks in particular, from the US subprime home loan crisis. The FTSE plunged 100 points while the German DAX and the French CAC 40 plummeted by 150 and 116 points respectively just before both markets closed.

In New York, financial and banking stocks were the big losers, with the Dow falling more than 130 points in midmorning trading. "Fear breeds fear," said Howard Wheeldon, a senior strategist at BGC Partners in London. "We are going to get more bad news. Corporate profits are going to be in further decline." This view was echoed across the City. "The banking sector is still very, very difficult," said Hugh Yarrow, a fund manager at Rathbone Unit Trust Management, whose parent company, Rathbone Brothers, has about US$22.3 billion (Dh82bn) under management. "Any worries about the value of their holdings and investors just start to panic," he said.

Barclays slipped 4.6 per cent and Société Générale slumped 3.8 per cent after JPMorgan Chase said Lehman Brothers Holdings may writedown about $4bn in credit related investments this quarter as the mortgage market deteriorates. A list of negative data left the markets jittery in Europe and Asia, sending the MSCI World Index to a two-year low. US index futures also dropped. The MSCI Asia Pacific Index slumped 2.1 per cent. Futures on the Standard & Poor's 500 Index fell one per cent. Reports yesterday showed German producer-price inflation last month accelerating at the fastest pace since October 1981, while German investor confidence rose more this month than economists forecast, after oil prices retreated from a record.

Producer prices climbed in the US to double the amount forecast by economists in July, reflecting a peak in oil prices that has since waned. To underline the slowdown in the US, construction companies built the fewest new homes in 17 years, while producer prices climbed by the most since 1981, providing no sign of an economic recovery or easing inflation. Housing starts fell 11 per cent last month to an annual rate of 965,000, the US Commerce Department reported. The Labour Department announced that the producer price index had jumped 9.8 per cent from a year before.

"There is no doubt we're in a period of stagflation now," said Peter Kretzmer, a senior economist at Bank of America in New York who formerly worked at both the Federal Reserve of New York and the Fed Board in Washington. * With Agencies