Shares plummet on fears of global slowdown
Richard Beales and Michael Mackenzie in New York and Christopher Brown-Humes in London

US stock indexes on Tuesday suffered their steepest drop since markets reopened following September 11 2001, as global investors fled risky assets after the biggest fall in Chinese shares for a decade.

The Dow Jones Industrial Average was down by more than 500 points at one point on Tuesday afternoon as worries about the US subprime mortgage market and a warning from Alan Greenspan, former chairman of the Federal Reserve, about a possible US recession punctured recent market optimism.

European stock markets also sold off, as did higher-risk debt markets. A sharp rise in the yen signalled the beginnings of an unwinding of the global carry trade, in which investors borrow in currencies with low interest rates to buy higher-yielding assets elsewhere. Shares in banks fell sharply.

Mainland Chinese shares kicked off the carnage, falling nearly 9 per cent amid fears that the authorities were planning a crackdown to cool the market’s exuberance. Traders saw the drop partly as a symptom of broader concerns over global valuations.

“The China explanation seems a little bit too convenient,” said Paul Hickey, analyst at Birinyi Associates. “Every day there is some new concern. These things don’t matter until they matter, then you get a sell-off like today.”

The FTSE Eurofirst 300 index dropped 2.86 per cent – its biggest daily fall for four years – while the FTSE 100 index fell 2.31 per cent, its largest fall since June.

On Wall Street, the Dow Jones Industrial Average fell 3.29 per cent, or 416.02 points. The majority of the drop came after the New York Stock Exchange had introduced trading curbs early in the afternoon – the first time computer trading had been limited since July – and coincided with technical hitches that delayed calculations of the Dow. The S&P 500 index fell 3.47 per cent. Both falls were the most in percentage terms since September 2002.

Leading emerging markets were among the hardest hit, with Turkish shares falling 4.5 per cent, Russia’s RTS index down 3.3 per cent and Brazil’s Bovespa index off 6.6 per cent.

“Markets that have risen faster than others will face a sharper decline as hedge funds reduce their exposure,” said Mary Ann Bartels, chief US market analyst at Merrill Lynch.

The global sell-off was aggravated by a weaker-than-expected 7.8 per cent fall in US durable goods orders in January, although that was partly offset by positive news on consumer confidence and housing. There was a flight to safety in bond markets, with yields on 10-year US Treasuries falling 12 basis points to 4.513 per cent. The cost of insuring European junk-rated credit against default saw one of the biggest one-day rises ever seen on the derivatives markets.

Bob Parker, deputy chairman of Credit Suisse Asset Management, said: “This is going to be more than just a one-day event and could go on for a few weeks. But it’s not the start of a one-year bear market trend.”

In early trading on Wednesday, Australia’s S&P/ASX 200 was down 3.3 per cent. Simon Hayley, senior international economist at Capital Economics, said: “If today’s global sell-off tells us anything, it is that sentiment in developed markets is fragile.”

Additional reporting by John Authers in New York. Copyright The Financial Times Limited 2007