Very hairy and very scary

Gloom swept world stock markets yesterday as bad economic and corporate news piled up, raising fears that recession is around the corner. The FTSE closed down 111.7 points at 5204.3 - its lowest level for nearly three years while the Techmark index also hit another low.

The London market had opened badly, after a mixed performance overnight in New York, and dismal manufacturing figures revealed another decline in the technology sector. The Bank of England also disappointed traders when it left interest rates unchanged despite the slowdown.

Wall Street fell from the opening bell, on worries about the outlook for corporate profits and in the wake of signs of weak business activity across the economy. These ranged from a profits warning by chip-maker Motorola to another from The Gap, America's biggest clothing chain, after a 17% collapse in same-store sales last month.

A key index, monitoring US non-manufacturing business levels, showed a surprise dip and another survey forecast rising US inflation, sparking fears of stagflation.

By lunchtime the Dow Jones was down 161 points at 9872 while the Nasdaq composite plunged another 36.38 to 1722.6 as fears mounted that semi-conductor giant Intel - regarded as a bellwether of US corporate well-being - would lower its sales targets for the third quarter in a trading statement due after the market's close.

One UK fund manager described the market as "very hairy and very scary" and another, who manages billions of pounds of insurance company investments, said that there were increasing worries that insurers - which own 25% of UK shares - could trigger a huge stock market plunge by ditching shares and running for safety: "There is panic in the market and concern about what consumers will do. It is feeding on itself. There is also talk that insurance companies will be forced to sell and go into cash and gilts. That is a possibility. We are not quite at that point. Nevertheless we could go a lot lower yet".

"It is virtually impossible to find one piece of reasonable news," said one London dealer. "Sentiment is as bad as I can remember for long time. The European markets are being put through the wringer."

In the UK, debt-burdened telecoms companies were worst hit, with crisis-hit Marconi down another 9p at just 29p. The company, which has debts of £4.4bn, is now valued at £810m.

Elsewhere, BT dropped 24.5p to 370.5p, its lowest level since 1997 while Vodafone lost 5.5p to 137.5p. Cable company Telewest, which along with Marconi will get booted out of the FTSE 100 next week, was also hammered. Its shares fell 11% to 40.75p and have now halved in a month.

"It's just a general malaise in the sector rather than any specific issue," said one analyst. "Telewest has been whacked pretty sharply in the past few days, even though there's been no real news out there." "It all comes back to what people overpaid for at the top of the bull market," said Graham Turner, of GFC Economics. "There's a lot more economic risk out there than people allowed for."

UK casualties were not limited to blue chips and telecoms. The FTSE 250 shed 95.2 points to 5,944.6 and markets tumbled across Europe.

The French CAC-40 lost 2% to close at its lowest levels for two years, while the German DAX30 dipped below 5000 points for the first time since August 1999. Only six German stocks - all old economy companies - showed gains as figures revealed a worse-than-expected fall in German manufacturing orders in July.

The AEX index in Amsterdam closed 8.2 points off at 504.87 but one Dutch investment bank trader warned that there was worse to come. "There are just no buyers in this market," he said. "We are getting the snowball effect."

The bulls who bet the wrong way

City experts have been taken by surprise by the plunge in stock markets, as these turn of the year forecasts for the FTSE 100 show.

HSBC

January 7,100 Latest 6,500

"We are probably looking more towards 6,000. We still think there is a good chance of a year end rally."

Strategist Steve Russell

Deutsche Bank

January 7,250 Latest 6,400

"Policy easing eventually works. If you look back to the spring we had 5,300 and within five weeks 6,000. The key will be convincing signs of economies turning round, especially in the US."

Strategist Bob Semple

Merrill Lynch

January 6,600 Latest 5,900

"FTSE companies are exposed to the US and Europe in terms of sales and in the US we have seen some signs of a trough."

Strategist Khuram Chaudhry

ABN Amro

January 7,200 Latest n/a

"Our forecast is in the process of review. Will it be with a view to a downgrade? Yes."

Strategist Gareth Williams

UBS Warburg

January 7,000 Latest 6,300

Dresdner Kleinwort Wasserstein

January 6,800 Latest n/a

Goldman Sachs

January 6,750 Latest 5,290

Latest betting on the year-end FTSE finish

below 5,000 15/8 fav

5,000 to 5,249.9 7-2

5,250 to 5,499.9 7-2

5,500 to 5,749.9 9-2

5,750 to 5,999.9 8-1

6,000 to 6,249.9 12-1

6,250 to 6,499.9 16-1

6,500 and above 12-1

Source for fixed odds: Bluesq.com