Worries about war with Iraq and negative corporate news on both sides of the Atlantic brought European markets back towards six-year lows yesterday.
There was little respite last night as the Dow Jones fell sharply at the opening. It later recovered some ground to edge back above the 8,000 threshold.
The Nasdaq and Standard & Poor's indices registered losses of around 1.5 per cent.
In Dublin, the ISEQ index suffered a 3.1 per cent decline, while the FTSE fell 2.69 per cent in London. The German DAX fared worst in Europe, falling 4.6 per cent.
While warnings from French telecoms group Alcatel and US insurer AIG knocked sentiment in technology and insurance stocks respectively, stock market losses yesterday were across the board.
The dollar weakened further to fractionally under $1.09 against the euro, approaching three year lows, while gold shot to six-year highs and oil prices rose.
March crude futures in New York rose 82 US cents, or 2.5 per cent, to $33.58 a barrel, within $1.70 of a 26-month high hit last month as the effects of a strike on Venezuelan supplies and high demand for winter heating fuel ate into inventories. Brent crude in London rose 84 cents to $31.09.
Worries about the prospects for war with Iraq ahead of a speech by US Secretary of State Mr Colin Powell dominated early stock market trading and the currency markets.
These were exacerbated by continuing disagreements between British prime minister Mr Tony Blair and his European counterparts following a meeting with French president Mr Jacques Chirac.
"The uncertainty over the war issue is gnawing at the markets," said one Dublin trader. "The meeting of Mr Blair and Mr Chirac has done nothing to ease that."
However, he added that the dollar was likely to keep falling if Mr Powell failed to persuade the United Nations Security Council to back a multilateral campaign against President Saddam Hussein.
Bad news on the corporate front only added to the gloom. AIG, the world's largest insurer, shook the market by announcing a charge of $1.8 billion after tax against the cost of liability claims in the US.
The hit on an insurer known for high premiums and keeping a tight rein on claims surprised investors. AIG's shares fell as much as 10 per cent, followed by rivals ACE, Travelers Property Casualty and Chubb, which all fell more than 5 per cent.
"AIG is more than a bellwether; it's a reflection of where the global economy is, and for them to say they have balance sheet problems, it calls into question valuations everywhere," said Mr John Gillette, ADR trader at investment firm Lazard Freres.
The plight of insurers was exacerbated by solvency fears in Europe.
A day earlier, the loosening of solvency guidelines by the British financial Services Authority had provided a fillip for the beleaguered sector but yesterday in the face of further market falls, investor scepticism kicked in.- (Additional reporting, Reuters)
