Renewed fears about the outlook for corporate earnings in the US, and further financial turmoil in Japan, sent stock markets around the world tumbling yesterday.
On Wall Street, the Dow Jones Industrial Average fell nearly 270 points at one stage, as investors became increasingly concerned that the crisis in Asia, and more difficult conditions in the domestic market, would slow profits growth. The Dow recovered some of its losses to end up 90.21 points down at 7756.29. A profits warning, late on Thursday, from Nike hit shares in the sportswear company, which dropped by 12 per cent in morning trading yesterday.
Markets had already been alarmed by a warning, earlier in the week, from Minnesota Mining & Manufacturing, which blamed the Asian crisis and a drop-off in US demand.
The expiry of Future and Option index contracts in the US and Britain added extra volatility to a day when many investors might have hoped to wind down quietly before the Christmas and New Year holidays.
Equity markets in Europe and the US had started December strongly and seemed to be heading for a New Year rally, helped by falling bond yields, with the yield on the 30-year US Treasury bond dropping below 6 per cent.
The long bond gained another half point in early trading yesterday as investors looked for a safe haven.
"The markets are caught between two conflicting influences from Asia," said Mr Peter Chambers, chief investment strategist at HSBC James Capel. "The crisis there creates deflationary pressures which are good news for bonds. Lower bond yields were initially supportive for stocks but now markets are becoming aware of the other side of the coin, the bad news for corporate earnings."
Data from the US mutual fund industry released yesterday also showed that investors pulled their money out of equity mutual funds for the second successive week.
Figures from AMG Data showed stock funds saw net outflows of $985m (£679.31)in the week ending December 17th, following a deficit of $1.26bn the previous week.
The willingness of private investors to put money into equities via mutual funds has been cited as one of the key factors supporting the US stock market in recent years.
Early in the day, the Nikkei 225 average shed 5.25 per cent. The share price weakness in Tokyo spread to Europe, where bourses took a further hit when Wall Street opened lower.
In Dublin, the ISEQ index fell by 50.20 to 3871.61 while in London, the FTSE 100 index fell 148.1 points to 5,020.2. The Amsterdam market fell 3 per cent and shares dropped by 2.5 per cent in both Paris and Frankfurt.
Emerging market bonds also suffered from investors' so-called flight to safety. Sentiment was hit hard as Standard & Poor's, the US credit rating agency, put Russia's sovereign debt rating on negative outlook to reflect the country's "worsening fiscal pressures".
At 1.30 p.m. New York time, Russia's principal notes had fallen $2.50 or more than 4 per cent to $52 1/8, while Brady bonds were lower across the board.
