Wall Street shares fell 2.4% when trading opened in New York yesterday, in the midst of the financial turmoil caused by the bankruptcy of Lehman Brothers.
The benchmark Dow Jones index dropped almost 267.8 points at 11,154.2, while the broader S&P and technology-heavy Nasdaq indices sank too.
The UK’s FTSE 100 index fell 4.78% in afternoon trade, France’s Cac 40 index shed 4.7% and Germany’s Dax lost 4%.
Earlier, Asian markets were hit by the news with Australian shares down 1.8%.
Several of Asia’s major stock exchanges – in Tokyo, Hong Kong, Shanghai and Seoul – were closed for holidays, but in Singapore the STI dropped 3.3% to hit a two-year low.
And in Taiwan, the benchmark share index closed down 4%, and in India share prices fell by more than 3.35%.
In markets that were trading, banking, insurance and financial sectors suffered most after the world’s fourth-largest investment bank, Lehman’s, specialising in huge loans to governments and big business, filed for bankruptcy protection yesterday morning.
Shares in the leading UK mortgage lender HBOS lost 33%.
Insurance shares in the UK also fell on reports that US giant AIG was seeking extra funds. Prudential dropped 10.6%, Norwich Union-owner Aviva fell 8.7%, and Barclay’s Bank fell by 10%.
AIG was until recently the world’s largest insurance company. It provides over a hundred billion dollars of capital to banks. Its share price collapsed by 40% and it is a favourite for the next to go bust.
The HBOS share reduction to 189 pence was also affected by concerns it and rivals face more write-downs and higher funding costs.
HBOS is more reliant than other major UK banks on borrowing in the wholesale markets for funding. its future is seen to be very murky.
In the light of the fall in the price of its shares, HBOS issued a statement in an attempt to reassure investors.
Gold, however, climbed more than 2%, by $25 to $775 an ounce.
The dollar fell against a number of currencies, on concerns about the US financial system’s stability.
The dollar fell more than 2% to 105.69 yen, from 107.76 on Friday. The euro rose to $1.4299 on Monday from $1.4215 late Friday in New York.
The pound was steady at $1.7954 against the dollar, having earlier hit a two-week high of $1.8128.
Shares in energy companies fell as the price of oil fell below $97 a barrel, with BP down 4% and Shell more than 3% lower.
Sainsbury’s shares fell 3.5% after the supermarket’s chief Justin King told the ‘Financial Times’ that consumer confidence was worse than it had ever been, going into the key Christmas trading period.
China’s central bank has cut interest rates for the first time in six years amid growing turmoil in global financial markets.
The key lending rate will fall to 7.2% from 7.47% with effect from Tuesday, while the amount of cash most banks must keep in reserve was cut by 1%.
Beijing has introduced a number of measures to halt food price rises.
With inflation cooling, China is keen to maintain stable economic growth.
‘We all knew that there would be monetary policy relaxation in China, but we didn’t expect the move would be so quick,’ said Gao Huiqing, an economist at the State Information Centre, a government think-tank.
All but the biggest banks will be allowed to reduce the proportion of deposits held in reserve from 25 September – the first time the central bank has cut reserve requirements since November 1999.
Recent figures have shown that Chinese economic growth has slowed this year as a result of constrained demand for its goods from overseas markets.