London shares slump into bear territory amid growing fears of recession

London shares slump into bear territory amid growing fears of recession

In another volatile day's trading, the FTSE 100 fell as low as 5358.7 as investors took fright from Tuesday's overnight falls in the US and Asia. This marked a decline of more than 20% in the 100 index since its recent peak of 6732.4 reached on June 15 last year, and fits the technical definition of a bear market.

But with a calmer start on Wall Street yesterday, the index recovered some ground to close at 5440.5, down 72.2 points. The falls were not confined to London. The Nikkei 225 lost 2.45% on Tuesday night, while the German DAX fell 1.43% yesterday and France's CAC 40 ended 1.54% lower.

Meanwhile, markets in New York rallied on sliding oil prices. The Dow Jones Industrial Average closed up 152 points, or 1.36%, at 11,384.21. The technology-heavy Nasdaq index closed the day 51 points up, or 2.28%, at 2,294.42. News that US pending home sales had fallen by a worse than expected 4.7% in May unnerved the market initially, but this was counterbalanced by comments from Federal Reserve chairman Ben Bernanke suggesting the central bank may extend its emergency lending facility for Wall Street firms in another attempt to ease the financial crisis.

Investors are still concerned that US and European banks, which begin their latest round of updates next week, may need to raise extra capital to bolster.....continued below

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These concerns resurfaced after a report from Lehman Brothers suggested that Fannie Mae and Freddie Mac, the two largest mortgage lenders in the US, might have to raise as much as $75bn in new capital between them, to comply with a proposed new accounting regulation.

"Financials are a big factor because there are fears of further writedowns when we see earnings next week, and this will keep markets on a back foot," said Stephen Pope, Cantor Fitzgerald's chief global market strategist.

A warning from the British Chambers of Commerce that the UK was in danger of heading for recession also hit sentiment, as did confirmation that housebuilder Persimmon planned to cut 1,100 jobs. Ted Scott, manager of the F&C UK Growth & Income Fund, said: "In terms of the economic backdrop we are still not in a recession. Despite months of gloomy headlines, house prices have so far only fallen a few percent from their peaks and unemployment is low, albeit rising. Therefore, if a recession does become a reality - and the risks lean that way - there could be further [for the market to fall]."

The Bank of England is due to make its latest interest rate decision tomorrow but given its worries about inflation, it is expected to leave rates on hold at 5%.

Yesterday's drop in the leading index followed a 99.9 point rise on Monday, a clear indication of the uncertainty surrounding the market at the moment.