'The sharks are circling'

The fog of fear is threatening to turn tomorrow into another manic Monday for global markets. "There's blood in the water and the sharks are circling," said Kurt Brunner, a portfolio manager at Swarthmore Group. "But this constant selling, you would think, has to ease at some point." After last week's carnage and chaos that swept through financial centres across the world, you would not bet on it. In New York on Friday, the Dow Jones Industrial Average and the Standard & Poor's 500 Index plummeted for an eighth day in a row. Across the Atlantic in London, stampede selling left the Footsie 21 per cent down on the week, wiping out more than £250 billion (Dh1.2 trillion) from the value of major blue chips. At the close, the Footsie had fallen below the 4,000 mark to 3,932.1, a five-year low. The massive sell-off was sparked by Thursday's plunge on Wall Street, which saw the Dow fall more than seven per cent. At one point on Friday, it was down 696 at 7,882.51 before recovering to end at 8,451.49, which was 1.49 per cent down.

"It's total panic. People are so scared that they are looking to liquidate everything that has cash value and to stay away from everything," said Bruce Dunn, the vice president of trading at New Jersey-based Auramet Trading, after Friday's closing bell on Wall Street. Panic was also evident across the Euro zone and Asia. Germany's DAX plunged seven per cent, while France's CAC-40 finished down 7.7 per cent. "It's a catastrophe," said Guillaume Duschesne, a Geneva-based equity strategist at Fortis Private Bank. "It's a negative spiral and sentiment is very bad. The fear of recession or zero growth is hurting stocks."

It was a similar story in Tokyo, where Japan's benchmark Nikkei Index went into free-fall, shedding 9.6 per cent to hit a five-year low. For the week, the Nikkei lost nearly a quarter of its value. In Hong Kong, the Hang Seng dropped by 7.2 per cent, mirroring sell-offs in markets across the region as investors worried about the risks of a global recession. At the close of trading, the Hang Seng index had dived by 1,146.37 points to 14,796.87 after earlier falling to 14,398.54, its lowest since Nov 2005.

"It's not about valuations, it's not about fundamentals, it's only about sentiment. And for as long as the sentiment is this weak, we will continue to fall," said Andrew Sullivan, a sales trader with Main First Securities. Elsewhere, Iceland, Russia, Austria and Indonesia suspended trading or stopped it for the entire day to slow the declines. "It is as if the bottom has fallen out of a bucket," said Kazuyoshi Kaneko, the Japanese transportation minister.

High anxiety is unlikely to subside this week as the deepening credit crunch pushes the global economy into recession and corporate profits increasingly become an afterthought as investors scramble to raise enough cash to weather the current financial storm. In the US, the corporate earnings season gets into full swing in the next seven days. Among financial institutions, JPMorgan Chase, Citigroup and Capital One Financial are all expected to release results. In midweek, September inflation figures will be released, while last month's US housing starts are due out on Friday.

But concerns that credit markets are still frozen, despite a series of moves to free up the money supply last week, still linger. Central banks across the world co-ordinated an interest-rate cut of 0.5 per cent last Wednesday. In addition, the UK announced an US$88bn (Dh323bn) blueprint to invest in major banks, as well as $350bn in new credit, while Spain agreed on a $41bn fund to support its banks. These steps were taken after the US launched a $700bn rescue package for Wall Street.

"Normally, I would say we are entering earnings season. But this is purely an emotion-driven market," said Owen Fitzpatrick, the head of the US equity group at Deutsche Bank Private Wealth Management in New York. "It's one where people are trying to raise as much liquidity as possible, and I am getting the sense that the severity of the reaction of the past few days tells you that maybe we are getting relatively close to raising enough capital."

Late on Friday, the US Treasury secretary Henry Paulson said the US was planning to buy equity stakes in financial institutions to help recapitalise banks. Analysts are also hoping to see a co-ordinated move come out of the Group of Seven (G7) industrialised nations to ease the cost for banks to borrow overnight dollars from, or among, each other. "There's some talk that the co-ordinated central banks of the G7 will look to basically insure interbank deposits," said Marc Pado, the US market strategist at Cantor Fitzgerald in San Francisco. "So that would drive Libor [the London interbank offered rate] down and basically tell the banks, 'look, do your normal business, if anything goes wrong, we'll pay for it'."

Banks and financial institutions in the US and Europe have been battered by the credit-crunch storm and the fallout from the subprime mortgage crisis. But in Asia the picture is slightly different, according to Yaga Venugopal Reddy, the former governor of India's central bank. He said yesterday that the region's banks were well capitalised and had fewer investments in credit instruments that had led to losses in their global rivals. Mr Reddy, who stepped down as governor of the Reserve Bank of India (RBI) last month, also believes Asia's "high-growth economies" will help countries counter a slowdown in world economic expansion. "I'm less pessimistic for Asia," Mr Reddy said at a conference in Singapore. "The global economy's centre of gravity is likely to shift towards the region in the next 10 years."

The intensifying crisis in world markets prompted the International Monetary Fund to announce last week that "advanced economies" would grow next year at the slowest pace since 1982. In comparison, India's economy will expand 6.9 per cent next year, while China is expected to grow 9.3 per cent. More than $5 trillion was erased from global equities last week even as central banks in the US, Asia and Europe were forced to cut rates after the year-long credit-market seizure stoked concern that banks would run short of money.

On Friday, India made the steepest cut since 2001 in the amount of cash that lenders need to set aside as reserves to kick-start the economy, after industrial output grew the least in 14 years and the rupee slumped to a record low. "The RBI's move is absolutely timely, absolutely appropriate, because the problem is one of liquidity," Mr Reddy said. * with agencies