World stocks fall on rate concern

The US Dow Jones index lost 311.5 points, or 2.3%, to 13,473.57, while the S&P 500 shed 2.3% to 1482.66.

In London, the FTSE 100 closed 203.1 points, or 3.2%, lower at 6251.20.

Many indexes have been trading at their highest levels in recent years, buoyed by low rates that fuelled high levels of consumer and corporate spending.

The concerns are nothing new, and analysts and investors have been warning that a number of factors are combining to create worrying conditions for equity and credit markets.

"Worries that have been out there for the past couple of years are coming to a head right now," said Edward Yardeni, president of Yardeni Research.

Shaky times?

Over the past few years there has been a boom in company profits, house price increases, and mergers and acquisitions.

Driving this have been low interest rates that have made it cheap for companies and consumers to borrow cash and finance purchases.

That period of cheap cash now seems to be coming to an end with central banks worldwide, including the Bank of England, raising their main rates to slow stubbornly high inflation.

At the same time, oil prices have climbed raising fears that inflation could also pick up again because of the higher energy costs.

Markets are in "risk reduction mode", said Thomas di Galoma of Jefferies & Co.

As stock prices tumbled, bonds rallied with investors looking for assets that could guarantee them steady, and relatively safe returns.

"You have a classic flight-to-quality rally," said Dean Junkans of Wells Fargo Private Bank, adding that markets outside of bonds were "finally appreciating risk".

Bill Schultz of McQueen, Ball & Associates said that: "A lot of people are moving out of stocks, out of riskier fixed income into short-term Treasuries."

"If the stock market recovers, you will see the rally pull back," he added.

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