FTSE hits a five-month low as volatility rises

 
Tim Wallace
Follow Tim

■ Bond prices drop as borrowing costs soar
■ Gold, copper and oil sink on fears over China

GLOBAL markets plunged yesterday on continuing fears that China’s economy is in trouble and that the US may start slowing down the pace of money printing.

Stocks, commodities and bonds all took a hit, raising the prospect of higher market interest rates and increased economic turmoil.

Rising interbank lending rates in China have raised the prospect of increased bad debts and firms going bankrupt, hitting the country’s already slowing growth.

Those worries sent Chinese shares into freefall – the Shanghai composite stock index plunged 5.29 per cent on the day in its biggest daily loss since August 2009, while the Hang Seng Index fell for a fourth straight session.

The slump sent shockwaves around the globe, pushing the price of commodities like copper down 2.5 per cent on worries that the world’s second largest economy is slowing and will need less of the metal.

And gold fell by as much as $20 to $1,277, with analysts from Goldman Sachs predicting the price of yellow metal will continue its downward trend in the next couple of years.

Britain also took a blow as the FTSE 100 fell 1.42 per cent to fresh five and a half-month low of 6,029.1. Government borrowing costs increased to an eight-month high – yields on 10-year gilts rose to 2.53 per cent, their highest since October 2012.

Much of the turmoil has been put down to continued uncertainty over the US Fed’s announcement last week that it is considering gradually withdrawing extra stimulus from the market late this year or early next year. The so-called taper would see the Fed reduce the amount of quantitative easing (QE) from the current $85bn per month, gradually cutting that as the economy recovers.

Markets have reacted badly to the idea after becoming used to being propped up by a steady flow of money printing.

But the Federal Reserve’s Richard Fisher refused to promise more QE just to keep markets happy, instead maintaining that the economy needs the stimulus to be slowed down gradually.

“I’m not in favour of going from wild turkey to cold turkey overnight,” the Bank of Dallas president said in a speech in London last night.

As global markets jittered, the Euro STOXX 50 Volatility Index – a measure of investors’ fears – rose 5.2 per cent to a nine-month high of 25.30 points.

The pan-European FTSEurofirst 300 index closed down 1.6 per cent at 1,114.19 points, its worst finish since November last year, while Germany’s Dax fell 1.2 per cent to 7,692.45 points.