FTSE and European stock markets fall after US and Asia rout | Business


Asian markets plunged overnight after Dow Jones registered its largest points fall in history

Carnage in the stock markets. An investor monitors stock prices at a brokerage house in Beijing as shares tumbled in Asia.

Carnage in the stock markets. An investor monitors stock prices at a brokerage house in Beijing as shares tumbled in Asia.
Photograph: Mark Schiefelbein/AP

Shares in London suffered heavy losses when markets opened on Tuesday after a wave of selling that began on Wall Street spread across Asia and Europe.

The FTSE 100 of Britain’s biggest listed companies fell 255 points or 3.5% to 7,079.41 as turmoil in global markets triggered by the biggest ever one-day points fall in America’s Dow Jones spread to the UK. The index later recovered some of its losses, down 138 points or 1.9% at 7,196.

Investors took fright elsewhere in Europe as trading got underway, with markets in Germany, France, Italy and Spain all down by more than 3%.

Why are stock markets falling?

For several weeks, economists and analysts have warned that inflation levels in major economies could increase this year beyond the 2% to 3% that central banks believe is good for developed countries. Official US figures turned those concerns into a sell-off last Friday, after they showed average wage rises in the US had reached 2.9%. The data increased fears that shop prices would soon rise further, increasing the pressure for high interest rates to calm the economy down. Investors then bolted at the prospect of an era of cheap money – which encourages consumers and companies to spend – coming to an end. Over the past month, several members of the US central bank, the Federal Reserve, have argued that three 0.25% interest rate rises scheduled for this year could become four or five.

Is there worse to come?

There is every prospect that the US economic data will continue to strengthen, increasing the potential for higher interest rates. President Donald Trump’s tax reform bill, which gained approval in Congress before Christmas, will inject more than $1tn (£710bn) into the US economy, much of it in the form of corporation tax cuts. Many firms have pledged to give a slice of the cash to their workers. Decades of flat wages should mean that increases expected in 2018 and possibly 2019 are too small to trigger a reaction from the central bank, but investors are betting rates will rise. As a consequence, stock market jitters could continue.

Is it a threat to the global economy?

Many developing world economies have borrowed heavily in dollars and will be stung by the higher cost of servicing their debts. On the other hand, a booming US economy will suck in imports from those nations, boosting the incomes of the developing world. However, the eurozone looks unlikely to increase interest rates until its recovery is more firmly anchored. That means the euro will continue to rise in value against the dollar, making it harder for European countries to export to the US.

“The stock market open in the UK and Europe looks about as bad as it can get,” said Jasper Lawler, the head of research at online trading firm London Capital Group. “The bloodbath on Wall Street, which was repeated in Asia has seen confidence evaporate in Europe.”

Falls in Europe followed a near 5% drop in Japan’s benchmark Nikkei 225 index and a 3.3% fall on Australia’s ASX200.

In Japan, the Nikkei 225 index declined by as much as 7% during the day’s trade before a slight recovery to close down 4.7%. The Nikkei’s decline of 1,071.84 points was its largest points fall since 2016.

Maki Sawada, from the investment research and investor services department at Nomura Securities Co, said stocks were being sold in panic after the Wall Street losses.

“The sell-off accelerated in a chain reaction,” she told Kyodo News.

Other markets across Asia also suffered losses. South Korea’s Composite Stock Price Index fell by about 3% in morning trade. Hong Kong’s Hang Seng index plunged 4.9% while the Shanghai Composite index lost 2.2%.

These losses followed the 1,175 point dive in the Dow Jones industrial average on Monday, with investors appearing to react to equity losses and concerns that central banks will soon increase interest rates to rein in inflation. It coincided with the arrival of Jerome Powell as the new chair of the US Federal Reserve.

“This was volatility unleashed,” said Jack Ablin, the chief investment officer at at Cresset Wealth. “It’s partially fear of interest rates, partially this new Fed chairman Jerome Powell, partially the market is overvalued relative to fundamentals.”

While market fear may not be based in any change in economic fundamentals, in its last meeting under chair Janet Yellen, the Federal Reserve indicated it expects inflation pressures to increase through the year.

According to projections released in December, officials expect three rate hikes in 2018 – so long as market conditions remain broadly as they are – but some economists believe the central bank could add another increase at its final meeting of the year.

If the market falls continue they could prove problematic for Donald Trump who has consistently touted record high stock markets as proof that his presidency is boosting the economy.

US stocks have now lost $1tn in value in the first five days of February. However, the White House, responding to the market drop insisted on Monday night that long-term economic fundamentals “remain exceptionally strong”.

Vice President Mike Pence characterised the stock market’s plunge as “simply the ebb and flow of our stock market”.

On Monday, the FTSE 100 suffered its worst single-day slump since Theresa May called the snap election last April.

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The index fell 1.3% to 7,345 – having peaked at almost 7,800 last month – extending its longest losing streak since November into a fifth day.

“The era of cheap money is ending, and for markets who got addicted to it, it’s undoubtedly bad news,” said Hussein Sayed, the chief market strategist at currency dealer FXTM.


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