People are far too hesitant to take risk and stocks are rea

People are far too hesitant to take risk and stocks are reacting to the outlook that as leverage is reduced, return on equity will be much lower.

Emerging markets were particularly hard hit. The MSCI Emerging Markets Index slumped 11 per cent, its largest daily decline since 1987.

Trading was temporarily stopped in some major emerging economies, including Russia, where the market fell by just over 19 per cent, and Brazil, where stocks fell as much as 15 per cent before closing 5.4 per cent lower.

This has been the biggest day so far for the capitulation of the long emerging markets trade, which has been in the works for weeks, said Alan Ruskin, chief international strategist at RBS Greenwich Capital.

Robert Zoellick, president of the World Bank, said the crisis in Europe and the US could prove a tipping point for many developing countries as falling exports and worsening credit conditions triggered business failures and banking emergencies.

The falls came despite a rash of government initiatives around the world, which seemed to have no positive effect on confidence, leaving investors to rush to the safety of government bonds.

The Fed on Monday announced a series of new measures designed to revive the credit and commercial paper markets, including discussions with the US Treasury that would mark a dramatic step into unsecured lending.


By the end of the trading day US stocks bounced higher, partly on the expectation that the next move would be a Fed rate cut co-ordinated with other central banks, on the grounds that this would have a much greater impact on credit markets than action by the Fed alone.

In Europe, investors earlier took no comfort in statements from the continents leaders at the weekend promising a co-ordinated approach and followed by individual actions.

Across Europe, governments followed Germanys weekend move to guarantee retail savers deposits, with similar steps taken in Denmark, Sweden and Austria.

In Iceland, the currency fell 30 per cent. Antje Praefcke, of Commerzbank, said: We would also not be surprised to see the Icelandic krona lose its function as a medium of payment.

Earlier, Japans benchmark Nikkei 225 index plunged 4.3 per cent to a 4½-year low. Jakarta suffered a 10 per cent drop

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