Volatility sweeps global markets  
 
 

US shares wobbled in early Friday trading after Thursday's sharp sell-off prompted by worries about higher interest rate levels.

However, further declines in stocks were tempered by news that the US economy had grown faster than expected in the three months to June.

European stocks were jittery, with London's FTSE 100 index rebounding into positive territory then falling back.

There are concerns that higher rates will hit profits and takeover deals.

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%.

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.

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.

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

Robert Peston
BBC 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%.

France's Cac-40 index of leading shares was down 1.1%, while Germany's Dax share index was down 0.7%.

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.

This followed New York's Dow Jones Industrial Average closing down 311.5 points, or 2.3%, at 13,473.57.

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 crunch

A tightening of availability of credit is behind much of the market uncertainty, observers say.

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.

People are concerned about what might happen rather than what is happening

Robert Parkes, UK equity strategist
HSBC

Q&A: World stock market falls

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.

Within the stock markets, bonds have rallied, with investors looking for assets that could guarantee them steady, and relatively safe returns.

"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".

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.

"People are concerned about what might happen rather than what is happening."

 

 
 
 
 
 
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