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FTSE 100 falls in second day of global market turbulence

The Guardian logo The Guardian 5 days ago Larry Elliott Economics editor

A man walks past a stock market indicator board in Tokyo, Japan, on Thursday. © EPA A man walks past a stock market indicator board in Tokyo, Japan, on Thursday. The City has felt the full impact of a sell-off in global financial markets with shares in the FTSE 100 index of leading companies now more than 10% below their record peak in May.

On a second day of turbulence, aftershocks from panic-selling on Wall Street rippled through Asian and European bourses as dealers took fright at trade tensions, the prospect of higher inflation and Donald Trump’s attempts to pressurise America’s central bank over interest rates.

The FTSE 100 – the index of UK blue-chip shares – closed almost 2% lower after dropping 138.81 points to 7006.93. After a closing peak of 7877 in late May, the FTSE has now lost more than 10% of its value – the definition of a market correction.

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Even steeper falls had been seen in Asia overnight on Wednesday. The Nikkei index in Tokyo lost 4%, while Hong Kong’s Hang Seng was down 3.8% and the Shanghai market tumbled 5.2%. Stock markets in Paris, Frankfurt and Milan were all down by more than 1% on Thursday and a broad measure of global equities – the FTSE all world index – fell to its lowest level since November 2017.

Better than expected US inflation figures failed to boost sentiment in New York, even though the muted rise in the cost of living eased pressure on the Federal Reserve to raise the cost of borrowing. Bond yields – a measure of the interest rate the US government has to pay on the money it borrows – fell for a second day.

News that core US inflation – excluding volatile items such as food and energy – had remained unchanged at 2.2% provided Trump with fresh evidence with which to attack the US central bank. The Fed, the president insisted, was making “a big mistake” with its policy of steadily increasing interest rates.

Trump said he had no plans to fire Jerome Powell – the man he appointed to chair the Fed – but was disappointed in the bank’s policies. He added that the central bank – which has raised interest rates eight times under Powell and his predecessor Janet Yellen since 2015 – was out of control and far too stringent.

The FTSE 100 – the index of UK blue-chip shares – closed almost 2% lower after dropping 138.81 points to 7006.93. © GETTY The FTSE 100 – the index of UK blue-chip shares – closed almost 2% lower after dropping 138.81 points to 7006.93. Since becoming president, Trump has repeatedly cited a rising stock market as evidence that his economic strategy was leading to higher growth and more jobs. Speaking as Wall Street had a fresh bout of jitters, the president said: “It’s a correction that I think is caused by the Fed and interest rates. The dollar is very strong, very powerful – and it causes difficulty doing business.”

The souring of relations has started to concern the markets, which expect the Fed to tighten policy again in December and to continue raising rates up to four times in 2019.

In early trading on Wall Street, the Dow Jones industrial average – the index of America’s 30 biggest companies – was more than 300 points lower at one stage before mounting a partial rally. Technology stocks, which bore the brunt of Wednesday’s selling, saw slight gains.

Oil prices were also lower, with sentiment affected both by plunging share prices and news of rising US crude stocks. Brent crude futures – the benchmark for the global market – were more than $2 lower at just over $81 a barrel.

“The bloodbath for global equities comes as investors adjust to a world of higher US interest rates”, said Jasper Lawler from the online trading firm London Capital Group. He added that investors were switching bets on so-called growth stocks, like America’s Facebook or Amazon, to “more conservative strategies”.

Trevor Greetham of the fund manager Royal London Asset Management said: “It’s not surprising to see a sharp rise in volatility given the negative cross currents for markets. Global growth is slowing, US interest rates are rising and Trump’s trade war rhetoric is hotting up ahead of next month’s midterm elections.

“Longer term, we expect the economic expansion to continue into 2019 and this should ultimately propel stock markets higher. Investors should note that US tax cuts and spending increases are still feeding through, interest rates elsewhere in the world are very low and China is easing policy to offset trade war fears.”

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