Stock markets around the world remained nervous today after yesterday's sharp falls, amid lingering fears about the global economy's recovery from recession.
Trading in London was volatile this morning, with the FTSE 100 index suffering further losses before climbing back into positive territory. By 11am it was just 6 points higher at 5251.22.
Yesterday the FTSE 100 suffered its biggest drop for six weeks, closing down 131.2 points at 5245.21, a fall of 2.44%. With US and Asian shares also falling sharply, Bank of Japan governor Masaaki Shirakawa warned today that the situation remained tense.
"Currency and stock markets are showing big fluctuations against the backdrop of heightened uncertainty about the US economic outlook. The Bank of Japan will closely watch market fluctuations and their impact on the Japanese economy," Shirakawa said.
Marc Ostwald, strategist at Monument Securities, said there had been "a lot of unwinding of positions, a general exit from risk assets" yesterday but noted that trading volumes were thin, with many people on holiday. "In a thin market, everything tends to get exaggerated. There are concerns out there without any doubt and it's a very reactive market. If someone sees something moving against them everyone rushes to the door."
He also observed that "people are still completely fixated with the US as a leader of the world economy and it isn't".
Earlier today the sell-off that began yesterday spread to Asia, with the Nikkei in Tokyo closing 0.86% lower, having been down 2% early on. The Hang Seng in Hong Kong fell by 0.89% while stocks in Seoul dropped more than 2%.
US stocks dropped sharply last night. The Dow Jones industrial average in New York lost 1.49%, the S&P 500 2.82% and the Nasdaq 3.01%.
"The basic problems the US economy is facing – no jobs, no new business formation, no savings, underinvestment, massive and growing debt – can't be solved by monetary policy," said Uwe Parpart, chief economist at Cantor Fitzgerald.
Fears that Britain could slide into a protracted depression intensified last night after the Bank of England warned of a long and "choppy recovery", a day after the US Federal Reserve issued a wary economic outlook and amid a slew of gloomy figures on both sides of the Atlantic. China also released weaker than expected economic data. This saw investors flee from equities and into perceived safe havens such as US Treasuries, gold and the yen.
Gary Jenkins at Evolution Securities said: "Some weaker than expected economic data, combined with the lower growth predictions from both the US and UK and the realisation that maybe the market had got a little ahead of itself in thinking that Mr Bernanke had some kind of magic wand that was going to make all the problems disappear led to a weak day for risk assets yesterday. "
The Bank of England's outlook intensified the debate over whether the economy is heading for a double-dip recession, or at least a period of very slow growth. The National Institute of Economic and Social Research thinktank defines depression as a period when output is below its previous peak, and predicts that in the UK's case this will last until 2012.
David Buik at BGC Partners talked of a "double whammy - the effect of uninspiring financial antibiotics for the creeping malaise of falling growth in the US and China, with Dr King's prognosis at the Bank of England's quarterly inflation report endorsing the necessity for keeping the patient in the sickbay being the icing on the cake".
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