City traders are braced for a white knuckle ride when markets reopen tomorrow morning, after Wall Street plunged 400 points late on Friday. Fresh fears emerged that the credit crunch will drag America deep into recession.
Oil prices jumped by $10 a barrel in a day, to close above $139, after remarks by Israel appeared to threaten military action against Iran; and investors took fright at the impact of yet higher energy costs for the gas-guzzling American economy.
'Everybody here is on tenterhooks,' said Brian Bethune, chief US financial economist at consultancy Global Insight. 'It was like throwing a grenade into the pigeons in Trafalgar Square.' He said Wall Street had become too complacent about the prospects for economic recovery and Friday's sell-off marked a reality check.
But the extraordinary $10 jump in the oil price also underlined fears that the market has been boosted by huge flows of speculative cash and is destined for a dramatic correction.
One of America's leading auto industry experts is calling on Congress to act to prevent a market crash. 'We have seen this before,' said David Cole, head of the Centre for Automotive Research in Detroit. 'In the late 1970s the price ran up to previously unimaginable heights and once it reached a peak it came crashing down, way below the levels traded before prices started to rise.' Cole believes that a sudden price fall could cause as much economic turmoil as the rapid rise seen over the past year.
'When prices collapsed in the late Seventies all investment in alternative fuel technology ceased and essentially led the auto industry to the mess it is in today,' Cole says. 'The same would happen if prices fell below $50 a barrel today. The whole cycle would repeat itself.'
Cole, with the support of leading US auto industry executives, is expected to call on Congress to set a lower limit for the price of oil. 'If we set a floor of $50 a barrel the investment the big auto manufacturers are making in alternative technologies will be protected,' he said. 'If not they will fail.'
