Market response to European meltdown

FTSE suffers worst quarter since 2002

Eurozone debt crisis wipes £212bn off leading index and markets across Europe see shares plummet by $1.2tn

the Guardian,

30 September, 2011

The FTSE 100 has suffered its worst quarterly loss since the dotcom bubble burst in the summer of 2002. The blue-chip index of leading shares has lost 13.7% of its value over the past three months as traders and investors grew increasingly anxious about the eurozone debt crisis.

The fourth-worst quarterly fall since the FTSE 100 index was formed in 1983 has wiped more than £212bn off the value of the UK's biggest companies since the start of July. The index lost 1.3%, about £18bn, to close at 5128.5 points yesterday.

While UK investors and pension funds will be nursing heavy losses, other European countries have been hit even harder, with $1.2tn (£1tn) wiped off the value off Europe's leading shares. The Euro Stox 50 index, which comprises Europe's biggest companies, dropped 25% – the biggest fall since the height of the credit crisis in the wake of the collapse of Lehman Brothers in the fourth quarter of 2008.

Germany's Dax index lost 25% of its value over the past three months – its biggest fall since 2002. Europe's biggest economy has suffered from growing fears about the future of Greece because it is on the hook for the biggest losses if Athens defaults. There also signs that the country's economy has slowed sharply in recent months.

Italy's MIB has lost 26.5% and Spain's Ibex 35 is off 17.5%. In France, the CAC 40 has lost 25.1% between July and September.

Banks have been the biggest fallers, with Germany's Deutsche Bank and Commerzbank both down by more than 30%. In France, Société Générale lost 51%, its biggest quarterly loss ever, and BNP Paribas has dropped more than 40%.

The crisis of investor confidence has spread around the world, with the FTSE All World Index suffering a 13.4% fall, the worst since the height of the credit crisis in the fourth quarter of 2008.

All three of the American stock indices have recorded double-digit quarterly drops for the first time since 2008. The Dow lost 11%, the Nasdaq fell 12% and the S&P 500 was down 13%.

Ronan Carr, a European equity strategist at Morgan Stanley, warned that conditions would probably get worse before they got better. "You don't get a sustainable rally until either the growth outlook improves or you get substantial progress on the sovereign debt crisis," he said. "In the absence of either of those things, investors should remain cautious and defensive positioned."

Ed Woolfitt, head of trading at Galvan Research, said: "I think if we break below that 4950 to 5000 mark, we're into what I would describe as no-man's land and vulnerable to freefall." However, RBS analysts said that the FTSE 100 and Dax falls both looked overcooked.

The falls have also hit some of the world's leading hedge funds, which are often blamed for profiting from falling markets. The average fund has dropped by 4.5% in the third quarter, according to Hedge Fund Research.

John Paulson, the American billionaire hedge fund manager who is betting on a global economic recovery by the end of next year, is reported to have suffered a disastrous month. In August, his flagship Advantage Plus fund plummeted 15%.

Man Group, the world's biggest listed hedge fund, has doubled the number of planned job cuts by April next year to 400 as part of a cost-cutting drive. The move by the London-based fund comes after it announced a surprise $6bn drop in assets under management this week.

Man had previously intended to cut about 200 jobs as part of an efficiency drive following its takeover of the rival hedge fund GLG Partners last October. Its shares have dropped 30% since its disappointing trading update on Wednesday.

Kenneth Heinz, president of Hedge Fund Research, told the Guardian that he expected the world's leading funds to report falls of about 2.5% in September, the biggest slide since May 2010.