The FTSE share index together with Germany’s Dax index and France’s Cac 40 index all tumbled in value yesterday as the markets reacted nervously to the news that the US had been stripped of its Triple A rating. Continuing problems in the Eurozone also contributed to a loss of confidence amongst traders which helped pushed the markets down further. The FTSE 100 index is down 4.1%, while the Dax fell by 5.7% and the Cac by 2.4%.
Spanish and Italian government bonds have also fallen despite the European Central Bank stepping into the markets to try and contain the cost of borrowing for the two countries. There are growing fears that both nations may need a Greek style bail out if the situation does not rapidly improve.
The US debt levels have resulted in America’s credit rating being downgraded for the first time in its history from the top AAA rating. The downgrading saw the US Dow Jones index fall by 5.6% – its biggest fall in three years.
The Asian markets fell sharply too on Tuesday for the second consecutive day, though they did recover about half their losses by the close of trading. The Nikkai was down 1.7%, while South Korea’s Kospi fell 3.64% and Hong Kong’s Hang Seng index fell 2.8%.
Alan Brown, Chief Investment Officer at Schroders painted a gloomy picture for a speedy recovery saying, “The underlying story is all of the weak economic data that we’ve seen across the eurozone and the UK and the US over the past several weeks. I think that investors are recognising that the authorities have very few policy levers left. They have exhausted fiscal options, interest rates in most places are at rock bottom. That is why markets are very nervous”.
He went on to say he supported the European Central Bank’s moves to help Italy and Spain, saying, “If they are able to keep a lid on yields in Italy and Spain then they will succeed in stopping the markets creating their own reality whereby they drive yields on Italian and Spanish debt to levels which would cause solvency problems in those countries”.
Chief Market Analyst at City Index, Peter Esho said, “You can’t control it. You have the onset of fear in the market. There are a lot of things that don’t make sense”.
As the markets reeled, the price of crude oil also dropped but the price of gold hit another record high as investors flocked to the perceived ‘safe haven’.