Markets ridden with recession fears

Recession fears came to the boil once again this week, sending confidence plummeting and the markets plunging for three consecutive sessions.
Bank of England Governor Mervyn King thoroughly depressed investors - and the UK plc - with his warnings that the country is in for a deep recession set to last through until 2009. In its latest inflation report, the Bank said that the economy could shrink by 2% in the first half of next year with little chance of recovery until the end of next year.

This outlook is the bleakest of the past decade and a marked shift from the forecasts of "broadly flat" growth three months ago. Adding to the gloom, figures from the Office for National Statistics revealed that unemployment climbed to an 11-year high in the UK in the three months to September. More job losses were on the cards with the likes of Royal Bank of Scotland, BT, GlaxoSmithKline, JCB, Virgin Media and Yell all slashing their workforces in a bid to cut costs.

All was also going pear-shaped on the European front with the 15-nation eurozone officially hitting recession after shrinking by a further 0.2% in the third quarter. Germany, the largest economy in the eurozone, and Italy had both already announced that a recession was upon them.

Elsewhere, ratings agency Fitch has trimmed its credit outlook for some of the world's emerging economies as a result of their exposure to the global economic downturn. The agency downgraded Mexico, Russia, South Africa and South Korea from "stable" to "negative", while credit ratings for Bulgaria, Hungary, Kazakhstan and Romania were also cut.

In the US, Treasury Secretary Henry Paulson announced a dramatic U-turn in its $700 billion bank bail-out when he abandoned the idea of buying toxic-related assets from financial institutions. He now wants to adopt the European style model and pump more cash into struggling banks and insurers in return for equity stakes.

Unsurprisingly with the global economic outlook worsening by the day, China's $600 billion economic package to stem falling growth and boost export levels did little to steady wrought nerves. 

As investors tried to make light of the seemingly endless flow of negative news, the markets took a turn for the worse on Tuesday with key indices embarking on a three-day losing streak. However, by the end of the week the bargain hunters were out in full force, with the Dow Jones soaring 11% in three hours on Thursday and the FTSE 100, Nikkei, CAC and Dax following suit on Friday. But the rally was not to last long with investors in the US markets running for the door once again on Friday as fears over the ever-deepening economic crisis quickly resurfaced on the back of yet more gloomy data.

More tales of woe flowed out of the financial sector with US mortgage giant Fannie Mae revealing third-quarter losses of $29 billion, Freddie Mac shedding more than $25 billion over the same period and bad debt charges continuing to plague HSBC.

Europe's biggest bank by asset value revealed that its US business suffered a $700 million rise in loan impairment charges to $4.3 billion between July and September. Its investment banking business saw a further $600 million disappear in credit crisis related losses. Write-downs would have been more than $1 billion higher but for an accounting change.

However, growth in its Asian businesses helped to cushion the worst of the damage caused by the "unprecedented turbulence" in the financial markets. Michael Geoghegan, group chief executive, said the banking industry was facing "extraordinary times" with worsening credit trends set to lead to more losses.

Meanwhile, building society Nationwide saw its bad debt lift to £74 million for the six months to September from £62 million for the same period the previous year as borrowers struggled to meet mortgage repayments in the face of the global economic crisis.

Further drama in HBOS-Lloyds merger

The drama in the HBOS-Lloyds saga stepped up a notch with Scottish duo Sir George Mathewson and Sir Peter Burt vying to keep HBOS as a standalone institution. They claim that the current deal of 0.605 Lloyds shares for each HBOS one significantly undervalues the company and suggested that they should take over the reins of the ailing bank from current chief executive Andy Hornby and chairman Lord Stevenson.

However, HBOS rejected the proposal claiming that the plan lacked details on how it would provide certainty and stability for shareholders and customers. Prime minister Gordon Brown later spoke out against the plan, claiming that Lloyds TSB is the only clear contender to take over beleaguered HBOS.

Barclays was also in doghouse with investors with major institutional shareholder Legal & General Investment Management and Aviva Investors outraged by the terms of the deal offered to Middle Eastern investors.

They are worried that shares will be overly diluted by the Middle Eastern move and that the ultimate cost of the £7.3 billion cash injection for a stake of around 30% in the bank will be too high. The dissenters say Barclays must revise its offering for long-term investors or feel the full force of their wrath at its extraordinary meeting on 24 November.

Spanish bank Santander, which owns Alliance & Leicester, Abbey and Bradford & Bingley, announced plans for a €7.2 billion rights issue to help it weather the credit storm. It will also hold off selling assets until the markets settle down again.

German lender Hypo Real Estate has announced bigger-than-expected losses of €3.1 billion for the third quarter. Dutch banking giant ING Group was also in hot water during the three months to September, forcing the group to report its first quarterly loss. Losses came in at €585 million for the third quarter compared to a profit of €1.95 billion for the same period the year before.

Meanwhile, insurance behemoth AIG was forced to go cap in hand to the US Government once again for a further $40 billion to tide it through the turbulence after announcing third quarter losses of $24.5 billion.

On the commodities front, oil prices continued to suffer as fears over the economy outweighed OPEC's comments that it could cut output again as early as the end of November. Prices slumped to a 22-month low at under $54 a barrel.

Sterling was also on a slippery slope against the dollar, falling to a six-year low of $1.4555. It just managed to avoid hitting a record low against the euro at 86.62p.