Global stock markets tumbled yesterday on fears the US economy is facing a sharp slowdown as the first monthly fall in employment in four years made an interest rate cut this month all but certain.
The evidence of weakness in the jobs market shocked investors and raised expectations that the US Federal Reserve would be forced to cut interest rates by as much as half a percentage point this month to save the economy from staving off recession.
Former Federal Reserve chairman Alan Greenspan added to the gloom when he said the credit turmoil reminded him of the 1987 and 1998 market crises.
"What we are observing in the last seven weeks is identical in many respects to what we saw in 1998, what we saw in the stock market crash of 1987," the Wall Street Journal quoted Mr Greenspan as saying.
Hedge fund Long-Term Capital Management controlled $100 billion in assets in 1998 but collapsed in the wake of a Russian debt crisis, wreaking havoc in derivatives markets. Mr Greenspan took over as Fed chief shortly before the Dow Jones share index slumped 23 per cent in a day in October 1987.
The US economy lost jobs last month for the first time in four years in a reversal that shook markets and makes it almost certain the Federal Reserve will cut interest rates later this month.
The fall increases the likelihood the Fed will cut half a percentage point off interest rates when it meets on September 18th.
"To do anything short of [cutting by 50bp] could only lead to market disappointment and a further worsening in already turbulent financial markets," said Rob Carnell, analyst at ING.
Meanwhile, fears for the global economy were heightened when Rodrigo Rato, managing director of the International Monetary Fund, said it was cutting its forecast for world economic growth because of the subprime crisis and turmoil in financial markets.
Mr Rato called the situation a "serious crisis". "Systemically important banks may face constraints in extending credit," he said, warning that the hit to growth was "likely to be largest for the US, but we may also see some impact in the euro area and Japan".
Stock markets in the US and Europe suffered heavy losses on the back of the US job figures and the dollar fell sharply as investors rushed into the safety of government bonds. At the close in New York, the Dow Jones Industrial Average was down 1.87 per cent to 13,113.38 while the S&P 500 lost 1.7 per cent to 1,453.55.
In London, the FTSE 100 fell 1.9 per cent to 6,191.2, leaving it back below its starting level for the year, and in Europe the FTSE Eurofirst 300 shed 2.2 per cent to 1494.88. Shares in financials bore the brunt of the sell-off.
The dollar fell to $1.3770 against the euro, within a whisker of its record low in July.
