Nervous markets teeter on the edge of further chaos

Sustained anxiety over the eurozone debt situation, combined with a Citigroup computer malfunction that triggered 16 billion of unintended share sales, caused the Dow yesterday to abruptly plunge 1,000 points - 9.2 per cent of its value - before recovering by two-thirds.

This almost unprecedented situation has left the markets and investors deeply confused: are we entering a global sovereign debt crisis or was this merely an anxious market reacting or over-reacting to a computer or "black box" trading error?

"It's panic selling," said Burt White at LPL Financial in Boston. "There's concern that the European situation might cool down global growth and freeze the credit markets." As a precaution, the Nasdaq exchange said it would cancel trades made shortly before the mid-afternoon plunge.

US officials are at a loss to explain what happened yesterday. In less than five minutes, shares in Procter & Gamble – a blue-chip household name – fell from $62 to $39 before rebounding, a pattern repeated with some of America's most prestigious firms including Apple, General Electric and Hewlett-Packard.

Further confusing the picture, the New York Stock Exchange said there were "a number of erroneous trades" during the tumble but no system errors. Still, the episode underlines how nervous the global markets have become about the global economy.

In Asia last night markets recovered some lost ground, indicating that traders accept that the slide was partly an over-reaction.

Still, forecasters believe FTSE shares are set to tumble again today by 100 points following yesterday's 80-point tumble. Reacting to indicators of a hung parliament, sterling hit a 12-month low against the dollar at $1.46 by 6.30 am this morning.

Similar losses are predicted for European exchanges today as the euro continues to weaken against the dollar.

According to Floyd Norris in the New York Times, investors "are again growing more hesitant to own assets like stocks and bonds, particularly since many now cost far more than they did only a few months ago. Another sharp retrenchment by investors, consumers and businesses could threaten the current global recovery by choking off financing and new orders for companies."

Nouriel Roubini, the New York University professor, says he's gloomy about the prospects for the world economy. "The bond vigilantes are walking out on Greece, Spain, Portugal, the UK and Iceland. The thing I worry about is the build-up of sovereign debt. Greece is just the tip of the iceberg, or the canary in the coal mine, for a much broader range of fiscal problems." ·