Global sell-off sees markets drop on fears over Fed stimulus and China

Julian Harris
Follow Julian
STOCKS and many other financial assets plunged yesterday as investors reacted to the US Federal Reserve’s threat to cut back on its stimulus programme, while worries over China added to market jitters.

The FTSE endured its sharpest daily drop since September 2011 as it lost nearly three per cent, eliminating another chunk of this year’s gains and returning to a level – 6,159.51 – last seen in January.

Equities across the world followed the lead set by US markets on Wednesday, which nosedived after Fed chief Ben Bernanke said it would reduce the size of its monthly asset purchases if the US recovery progressed as well as expected.

The Fed is currently putting $85bn each month into quantitative easing (QE).

“Bernanke may just have fired the starting pistol on a wave of selling that might go on for weeks,” said IG’s Brenda Kelly. “Today’s market action was like a day out at Alton Towers only with more spills than thrills and a plethora of nauseating effects.” The heavy weight of the Fed chairman’s comments has seen some investors give him the nickname “Bear-nanke”.

Shares in Europe sank, with the French Cac down 3.6 per cent, Germany’s Dax down 3.3 per cent, Spain’s Ibex down 3.4 and Italy’s FTSE Mib down 3.1 per cent.

Commodities were also hit, with Brent crude dropping nearly four per cent to $102.16 a barrel while spot gold fell over six per cent to around $1,285 an ounce.

The retreat hit government bonds, particularly in debt-troubled Eurozone states. Yields on Italian 10-years climbed to 4.55 per cent – up 6.77 per cent – while the Spanish equivalent were up over seven per cent, to 4.85 per cent. Yields on UK 10-year gilts, meanwhile, rose to 2.29 per cent – their highest since March last year.

And the prospect of America’s ultra-loose monetary stance being slowly tightened sent the dollar up 0.5 per cent against the euro and over 1.5 per cent against the yen.

Worries over China were also behind the market movements. Factory activity in the fast-growing Asian giant weakened to a nine-month low in June, data showed yesterday. And fears have emerged over credit levels amid the country’s financial sector, with the Shanghai Interbank Offered Rate – known as Shibor – climbing over 500 basis points on the overnight level to 13.4 per cent, yesterday.

News has been more positive in the US, however, where leading indicators – designed to measure future economic activity – hit a close to five year high in May. Initial jobless claims rose last week, but not by enough to dent sentiment.