Shares in London plunged for a sixth day and by the largest amount since the Brexit vote, as concerns grew that febrile global stock markets, which have lost $4tn (£2.9tn) in value since Friday, were in the grip of panic-selling.
The FTSE 100 slumped 2.6% to 7,141 to wipe all the gains from this year’s trading and set the index of Britain’s most valuable companies on course for a second week of losses. Investors took fright elsewhere in Europe, with markets in Germany, France and Spain all closing down by more than 2%.
Stocks also tumbled across Asia earlier in the day. The Tokyo Nikkei 225 index was among the worst affected after shares fell by more than 4% to 21,620, leaving them 12% down on last month’s peak of 24,120.
Wall Street, where the global stock market rout began on Monday, had a second day of volatile, high volume trading with wild swings in share prices. The Dow Jones industrial average fell by as much as 2.2% following the opening bell before recovering within half an hour to a gain of more than 1%, then see-sawing further through the session.
The losses in Europe and Asia followed concerns that central banks will increase interest rates this year by more than expected in response to inflationary pressures from surging global economies.
In her last meeting as chair of the Federal Reserve last week, Janet Yellen hinted that stronger than expected inflation could prompt the central bank to review its policy of three rate increases this year. Fed rate-setter Robert Kaplan on Monday repeated the message that three hikes may not be enough to keep inflation in check.
Analysts said figures on Friday from the US showing a strong recovery in average weekly earnings, which many believe could feed through into rising prices, were another trigger for Monday’s panic-selling in New York. The Dow dropped 1,175 points, the largest one-day points fall on record. In percentage terms, at 4.6%, it was the biggest decline in a day since 2011.
Jasper Lawler, the head of research at online trading firm London Capital Group, said the Wall Street sell off on Monday that was repeated in Asia had “seen confidence evaporate in Europe”.
Brent Schutte, chief investment strategist at Northwestern Mutual Wealth Management, said the plunge was not caused by inflation fears alone. The markets had been unusually calm since late 2016, he said, and investors were betting that would continue.
“People were positioned for more central bank easing or continued central bank easing, low rates, and importantly, low volatility,” he said. “Corrections are caused by people having to reposition for new environments.”
The Vix index, which measures the volatility of global markets, on Monday suffered its highest one-day spike on record.
Last November Kaplan said stock markets were in danger of being in a bubble that could burst after the value of a broader measure of stocks in New York, the S&P 500 index, hit 135% of US GDP, the highest since the dotcom bubble burst in 1999-2000.
Steven Mnuchin, the US Treasury secretary, sought to calm fears of fresh falls in stock prices on Tuesday. He said in testimony to Congress that markets were functioning very well and the current market selloff was just a correction. He said market fundamentals were strong and algorithmic trading was in part to blame for the sudden drop on Monday.
There were no financial stability implications in the recent market moves, he added, although the administration was monitoring the situation. The Dow is still up 20% over the last year while the S&P 500 was 15% higher.
But there was contagion to other markets, with metal prices dropping by more than 2% and the oil price lower for the fourth day. “We read this as a stock-driven selloff,” ING metals analyst Oliver Nugent said. “It’s market contagion. There’s nothing really happening on the fundamentals front.”
Paul Donovan, chief global economist at UBS, said the stock market fall was likely to be choked off while the global economy remained strong. He said that while inflation could rise by more than expected this year, it was likely to remain muted. “This is not a fundamentals-driven selloff. It is a technical selloff that is exaggerated by fund managers trading in volatility.”
He said all the major industrialised nations grew together last year as the recovery in the eurozone, coupled with a resurgent Japan, took hold. “This has happened only seven times in the last 30 years,” he said. “And while this has been a long recovery that inevitably prompts people to ask when is the next recession coming, it has been a mild recovery and it remains on course to continue this year.”