Double-dip fear as markets seek reassurance

Traders worried that politicians and bankers are failing to calm share jitters

'It will feel like a double dip. But it is a moot call as to whether we have two quarters of negative growth. But it will certainly feel like it."

That was the view of Edward Bonham Carter, the chief executive of fund manager Jupiter Fund Management, on Friday after one of the hairiest days on the London Stock Exchange, with share prices falling to levels not seen since 1997 – the first year of the new Labour government.

Mr Bonham Carter, who looks after nearly £25bn of funds, added: "We see this chapter as part of the debt build up in the West in the midst of eruptions in Europe. But we are wary of predictions. The nature of a crisis is they are unexpected."

The FTSE's plummet – ending the week 5 per cent lower with a total of £72.7bn wiped off its value – was echoed throughout Europe with Germany's DAX closing down 2.2 per cent and Paris's CAC 40 ending the day down 1.9 per cent; while in New York the Dow Jones closed on Friday down 1.6 per cent having fluctuated throughout the day.

Friday's falls followed a week of volatility, with banks' stocks hitting a two-year low: Lloyds Banking Group was down 6 per cent, Barclays down 3.8 per cent and Royal Bank of Scotland down 1.2 per cent. French bank shares continued to fall on worries over their solvency – BNP Paribas fell to a new 52-week low during Friday's trading when it reached €32.50, down 35.8 per cent in this period and down 4.3 per cent on the day.

The value of the UK Government's holding in RBS fell by £26bn while that in Lloyds dropped by around £10bn.

President Nicolas Sarkozy of France and Chancellor Angela Merkel of Germany had hoped their plans for much closer economic co-operation between members of the eurozone would calm the markets, but failure to clarify how debts would be repaid and the ruling out of eurobonds left the markets unimpressed and failed to stop the contagion.

The Franco-German proposals for a Europe-wide financial transactions tax – known as a Tobin tax – hit financial shares particularly hard, prompting Mark Williamson, an analyst at Peel Hunt, to say: "If you want to get rid of the financial services industry this is a pretty good way to go about it."

Now the markets are looking for reassurance. James Knightley, a senior economist at ING, said: "With markets firmly back in 'risk-off' mode, attention will focus on policy makers' reactions, be they politicians or central bankers. Fed chairman Ben Bernanke will give his headline speech at the Jackson Hole conference on Friday. He may raise the prospect of further stimulus through quantitative easing. However, he previously argued that QE was a tool to fight deflation and this is at odds with core inflation likely pushing above 2 per cent in the next few months."

The US has faced another week of pessimistic data updates. The Philadelphia Federal Reserve Bank's business activity index showed factory output in the US mid-Atlantic region fell to its lowest level since March 2009, while those claiming unemployment benefits in the US rose by a greater-than-expected 9,000, to 408,000.

In the UK, the fear of slowing growth dominated, with the volume of retail sales growing by just 0.2 per cent in the last month, according to data from the Office for National Statistics, unchanged on last year.

US and German benchmark government bond yields rose slightly on Friday, but were still near their recent lows of earlier in the week.

But City opinion is divided over whether investors and traders have overreacted to the gloomy figures. Even good news, such as the boost from Chancellor George Osborne, who announced that lower-than-expected borrowings of just £20m were reported during July, failed to lift people out of their despair.

Dan Morris, a markets strategist at JP Morgan, said: "There is a sense of dismay at the reaction by the markets. Fundamentally what we are seeing is an overreaction.

"There has been some good data – such as the retail sales data – but this has been ignored. We need more than a couple of points of good news. The market needs more than this to change. We are waiting for that magic moment when sentiment changes."

But the likelihood of a UK recession is a real possibility. Jon Peace, head of bank research at Nomura, said: "The UK is close to zero growth and it would be relatively easy for us to fall into recession, but across Europe there is a wide spectrum of situations. But it is true to say that more countries are in danger of moving from mild growth into mild recession."

But Mr Bonham Carter thinks there could be good buying opportunities for the brave. He said: "In our view, large cap equities are well placed to weather the storm. For longer-term investors it is a good time to invest. You could argue, in a contrary sense, that it is a good time to invest in equities – particularly for companies such as healthcare and pharmaceuticals."

On Friday, US stocks fluctuated between gains and losses as investors weighed up the growing concern over the global economy and Europe's debt crisis against the fact that many valuations were near 2009 levels, making prices look cheap. But while the long-term investor should be thinking of investing in equities, data shows investors have exited $42bn (£25bn) from global equity funds this month.

Investors have been heading to the safe havens of gold and the Swiss franc for many months and this has continued, with gold hitting another high of $1,877 on Friday, as the Japanese yen reached its highest level against the dollar since the Second World War.

Indeed, the market is so uncertain that on Friday a call put into HSBC for comment was declined. HSBC bankers declined to make comment because the market is too volatile.