The year began with many expecting the upward trend of last year to continue, believing that Asia would remain immune to the gathering problems in the United States.

However, bad news soon surfaced. On January 15, Merrill Lynch said it had raised US$6.6 billion to cover subprime loans, sending the Hang Seng Index to an almost six-month low. A day later, the HSI suffered its biggest one-day percentage drop since the September 11, 2001, terrorist attacks when Citigroup reported larger than expected write-downs and data showed US consumer spending had slowed.

The Hang Seng leapt 10.72 per cent to 24,090.17 points on January 22, its biggest percentage gain in 10 years, when the US cut interest rates by an unexpected 75 basis points. Mainland investors saw the move as evidence of weakness in the US, and the Shanghai Composite Index dived 7.22 per cent to 4,559.75 points.

The positive effect on the HSI was short-lived, as the first real banking bombshell of the year hit. Societe Generale announced losses of Euro4.9 billion (HK$53.19 billion) from rogue trader Jerome Kerviel.

The Hong Kong market hit 21,084.61 points on March 17 when cash-strapped Bear Stearns was sold to JP Morgan, initially for less than 10 per cent of its ostensible value.

The following week, JP Morgan sweetened its offer for Bear, and a rise in US housing sales began a rally on the Hong Kong exchange that continued into early May.

Investors reacted positively to multibillion-dollar write-downs from Deutsche Bank and UBS and the raising of funds by Lehman Brothers Holdings, thinking, wrongly in the last case, they were getting their houses in order.

On the mainland, the Ministry of Finance cut the stamp duty from 0.3 per cent to 0.1 per cent on April 23, driving the Shanghai market up 9.29 per cent the following day, its single biggest one-day rally in more than six years.

However, profit taking quickly ended the rally on both markets, and the Sichuan earthquake, soaring oil prices and rising inflation during the spring and summer tipped the markets into a slide. The close of the first half saw the HSI's worst performance in 14 years, as it slumped 20.75 per cent and lost HK$16.36 trillion in market capitalisation.

The slide continued and the index hit 21,174.77 points on July 15 after oil rose to a historic high of US$147.27 a barrel on July 11 in New York and the US Federal Reserve started to prop up the weakening mortgage lenders Fannie Mae and Freddie Mac.

In July, the downward trend picked up again, as US data showed further weakness in the housing market and consumer spending, and Asian economies, including Hong Kong, slowed.

The HSI broke through its March 17 low on August 18 and fell through the psychologically important 20,000-point level on September 5, when it closed at 19,933.28.

The markets were shattered again when 158-year-old US investment bank Lehman Brothers filed for bankruptcy on September 15 and Merrill Lynch, the largest broker in the world, was bought by Bank of America Corp.

Global equity markets spiralled downwards, with the HSI falling to 17,632.46, and global central banks pumped US$180 billion into the financial system.

The US quickly followed up with a US$700 billion bailout plan.

On the mainland, the government stepped in again in September, when the market showed signs of crashing below the 2,000-point level, and scrapped the stamp tax on share purchases. The Shanghai index shot up 9.46 per cent on September 19 to close at 2,075.091 points but came out of the week-long National Day holiday with a 5.23 per cent slide.

The HSI closed at 15,431.73 points on October 8, the first close below 16,000 in two years. The index was trading at about 10 times earnings and closing in on the 8.8 times seen during the Asian financial crisis in 1998.

Three days later, the market fell through the 15,000-point level to close at 14,796.87 as co-ordinated rate cuts and more liquidity boosting measures from central banks failed to work. Comparisons with the Depression of the 1930s gained wider currency.

Stocks rallied after world leaders at a Group of Seven meeting with the global financial crisis at the top of the agenda agreed to flood the market with an unlimited amount of cash to prevent a collapse of the financial system.

By the end of October, the HSI was at a rock-bottom 11,015.84 points. It fell as much as 15.39 per cent during trading on October 27, its biggest intraday drop since the 1989 crash following the Tiananmen Square crackdown, wiping out almost HK$1 trillion in market capitalisation.

A short rally back up to 14,840.16 points, fuelled by bargain hunting and a cut in the US federal funds rate to 1 per cent, dissipated quickly. In Shanghai, the index jumped 7.27 per cent after the State Council unveiled a 4 trillion yuan (HK$4.53 trillion) investment plan on November 10.

The Fed's change of direction for the Troubled Assets Relief Programme to rescue consumer credit markets instead of buying toxic assets, plus poor economic data and haggling over a vehicle sector bailout, brought the Hang Seng back to 12,298.56 points on November 20.

News that Chinese banks in Hong Kong could tap mainland liquidity got the market rising again. It was boosted by US president-elect Barack Obama's pledge to raise infrastructure spending to levels not seen since the 1950s.

The market added almost HK$1 trillion in capitalisation on December 8 as the Hang Seng Index surged 8.66 per cent, and the rally hit a high of 15,613.9 points three days later. The index had risen 42 per cent since the 11,015.84 close of October 27.

That rally was stalled as US lawmakers rejected a bailout of the country's vehicle industry.

The Fed cut interest rates to zero the following week, which ended on Friday with the HSI at 15,127.51 points and Shanghai at 2,018.463.

Stomach-churning

It seemed as though the flow of rally-stifling bad news would never stop

During trading on October 27, the Hang Seng Index fell as much as: 15.4%