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Volatility sweeps global markets Volatility sweeps global markets
(about 2 hours later)
US shares wobbled in early Friday trading after Thursday's sharp sell-off prompted by worries about higher interest rate levels. US stock markets have dropped sharply, extending a global share sell-off amid fears about the effect of higher interest rates on the world economy.
However, further declines in stocks were tempered by news that the US economy had grown faster than expected in the three months to June. There are concerns that higher rates will hit corporate profits and takeover deals, and dent consumer spending.
European stocks were jittery, with London's FTSE 100 index rebounding into positive territory then falling back. European markets were also jittery, with London's share index closing down for a fourth day and ending at its lowest level since the middle of March.
There are concerns that higher rates will hit profits and takeover deals. Analysts have warned that markets could remain volatile for a number of weeks.
That seems to have caused a big sell-off on Thursday, with the London market down more than 3%, the biggest one-day percentage loss since 2002, and the US market off more than 2%. "I think you've got bargain hunters out there for sure and I think you've got some people who are still scared," said Randy Frederic of Charles Schwab & Co.
But on Friday US Commerce department data showed that, on an annual basis, the US economy grew by a robus 3.4% in the second quarter of 2007. "We're seeing the convergence of a whole host of sort of unrelated or only slightly related issues," he explained.
At the same time, core consumer prices - excluding food and energy - rose by 1.4% over the period, their slowest quarterly rate of growth since 2003. Share fall
Worrying conditions
By 1450BST, the Dow Jones was down 0.27%, 36.5 points to 13,437.1 points while the Nasdaq fell 0.4% to 2,588.2
The stock market as a whole may be set for some dismal days Robert PestonBBC Business Editor Read Robert's blogThe stock market as a whole may be set for some dismal days Robert PestonBBC Business Editor Read Robert's blog
Meanwhile, the FTSE 100 was trading down 27.1 points, 0.43% at 6,202.7, after earlier recovering from an initial fall of 0.9%. In New York, the Dow Jones Industrial Average of leading shares fell and was recently trading 118.52 points, or 0.9% lower, at 13,355.05.
France's Cac-40 index of leading shares was down 1.1%, while Germany's Dax share index was down 0.7%. The wider measure of the US stock market, the S&P 500, was down 0.5% and the Nasdaq index, which largely tracks high-tech stocks, was 1.2% lower.
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. Earlier, the FTSE 100 index of leading shares on the London market had closed 36 points, or 0.6%, lower at 6215.20. France's Cac-40 index of leading shares and Germany's Dax also declined.
This followed New York's Dow Jones Industrial Average closing down 311.5 points, or 2.3%, at 13,473.57. In Asia, the Wall Street slump on Thursday led to Japan's Nikkei closing down 418.28 points, or 2.4%, at 17,283.81, while Hong Kong's index ended 2.7% lower.
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 crunchCredit crunch
A tightening of availability of credit is behind much of the market uncertainty, observers say. The main underlying problem is that many investors are worried about an impending credit crunch.
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. In past years, financial markets, companies and consumers have all benefited from low interest rates and easy access to money, helping fuel a boom in spending, house price inflation and corporate takeovers.
People are concerned about what might happen rather than what is happening Robert Parkes, UK equity strategistHSBC Q&A: World stock market falls When there's uncertainty about financing, then private equity is not so quick to make deals Elliot Spar of Ryan Beck & Co Q&A: World stock market falls
Now, interest rates are rising and set to stay higher as central banks try to rein in inflation.
A large part of the rise in share prices in the past year has been 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.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.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. "When there's uncertainty about financing, then private equity is not so quick to make deals," said Elliot Spar of Ryan Beck & Co.
"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". "It would take out one of the props for the market."
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. Downhill track
"People are concerned about what might happen rather than what is happening." At the same time, oil prices have climbed, raising fears that inflation could also pick up again because of higher energy costs.
US markets bounced back slightly on Friday after figures showed that the US economy had grown more quickly in three months to June than analysts had first thought.
US Commerce department data showed that, on an annual basis, the US economy grew by a robust 3.4% in the second quarter of 2007.
However, the respite was short-lived as analysts fretted that the figures may increase the chances of further interest rate rises in the US.