Fears are growing about a market meltdown after London's FTSE Index fell dramatically for three straight days touching new yearly lows.
"The market could end at about 4,000 in this climate of fear," said an analyst who believes that the more optimistic forecasts for this year should now be abandoned.
The freefall of the last three days has sent both small investors and giant pension rushing for the exit. "People are selling shares because they do not trust the market any more," said one analyst.
On Friday London's FTSE Index fell more than 150 points to hit 4,750. The market has lost 310 points in the past week. Friday's crash was triggered by a barrage of bad news from the banking sector.
Stock market analysts now believe that the market will drop sharply in the next few days amid newspaper reports that scared investors were "dumping shares" and that the market slump was set to worsen.
The giant pension funds too have reportedly bailed out of the market and are sitting on a cash pile of nearly [pounds sterling] 100 billion. This represents about 11 per cent of their assets and is double what they usually keep in cash.
On Friday bank stocks led the freefall after Merrill Lynch announced that it had exposures of over $ 2 billion in 300 high-risk hedge funds. More bad news came from Swiss giant UBS which announced that chairman Mathis Cabiallavetta and other senior executives had quit because of hedge fund losses.
Friday's helter-skelter fall came in the wake of steep drops on Thursday and the day before when the index plunged below 5,000 for the first time this year. The market value of top British companies has fallen by more than [pounds sterling] 60 billion in just three days last week.
The giant banks have been amongst the hardest hit in the market mayhem of the last three days. Standard Chartered Bank has fallen nearly 45 per cent since its peak in July. On Friday Lloyds TSB Bank fell steeply by 27 pence to 575 pence.
Only two months ago the FTSE was at a record high of 6, 179 beating all predictions for this year. Analysts reckon that some badly hit stocks have lost more than 25 per cent in the bloodbath that has taken place since then.
If the FTSE hits 4,650 which appears increasingly likely it would represent a 50 per cent retracement of the bull market which started in 1995. One week ago the FTSE stood at 5,061.
Frankfurt's DAX Index has also had a bad week and lost 547 points to hit 4,014 on Friday evening. The Paris CAC lost 425 points and was at 2,985.
British investors are fleeing to the relative safety of government-issued gilts and corporate bonds and widow and orphan stock like utilities which are reckoned to hold up during recessionary times.
The ebullient mood of the City has given way to fear as traders and analysts worry about job security.
Market analysts are hoping that the British will follow the example of the Americans and introduce interest rate cuts in the near future. But many analysts now say that interest rate reductions won't be enough to pull the market out of its gloomy mood.
