The FTSE 100 has tumbled as investors brace themselves for an extension of coronavirus lockdown measures and as warnings about the economy grow louder.
Britain’s FTSE 100 index was down 2.8 per cent at 5,630 points by the early afternoon, having fallen yesterday while other indices rose.
The FTSE 250, made up of smaller domestically-focused stocks, plunged four per cent.
European and US indices also fell as uncertainty returned to markets. The pan-European Stoxx 600 was down 2.7 per cent and Germany’s Dax was 3.5 per cent lower.
Wall Street’s S&P 500 index was 2.4 per cent lower shortly after the bell. The Dow Jones was down 2.3 per cent and the Nasdaq was also down two per cent.
Renewed pessimism about the global economy put pressure on stocks today, after a bleak report from the International Monetary Fund (IMF).
The IMF yesterday said the world economy would shrink by three per cent this year. The Fund said the “Great Lockdown” would likely cause the “worst recession since the Great Depression”.
In the UK, the budget watchdog yesterday warned things could be even worse than the IMF predicted. The Office for Budget Responsibility (OBR) said GDP could fall 35 per cent in the second quarter if the lockdown stretches to three months, with the economy shrinking 13 per cent in 2020 overall.
Oil price falls weigh on FTSE 100
All this is weighing on investors’ minds this morning, as are falling oil prices and the start of earnings season.
Brent crude was down 4.5 per cent to $28.30 per barrel this afternoon. This dragged down the energy-focused FTSE 100, where BP and Shell both slumped.
Joshue Mahony, market analyst at trading platform IG, said the “crude slump has been most detrimental to those smaller producers on the FTSE 250, with the likes of Tullow and Premier Oil hit hard”.
The FTSE 100 has also been affected by the UK government’s intention to keep coronavirus lockdown measures in place even as some European countries open up their economies.
Some European countries such as Spain and Austria are easing lockdown measures. But the British government is expected to announce a continuation of restrictions tomorrow.
Jasper Lawler, head of research at London Capital Group, said: “The lack of an ‘exit plan’ from the UK lockdown is starting to become a negative overhang for UK equities while left unresolved.”
The risk-off sentiment has interrupted the stock market rally of the last few weeks, which had been driven by signs that coronavirus may be slowing.
“Dealers love to snap up relatively cheap stocks,” said David Madden, market analyst at CMC Markets. “So even small inclinations that the health crisis is being brought under control provided an excuse for the bulls.”
Earnings season drags down stocks
However, US stocks fell today as earnings season picked up speed. Wall Street giants Goldman Sachs and Bank of America today revealed their profits plunged by nearly half in the first quarter of 2020.
Wall Street’s biggest names have set aside billions of dollars to deal with bad loans. Lawler said this has spooked markets. “Surging bad loans seen in US bank earnings has UK investors bracing for the same in the FTSE’s heavily weighted banking sector,” he said.
The pound slipped 1.2 per cent against the dollar to $1.247 as investors sold shares and returned to the “safe haven” greenback. The dollar rose one per cent on an index that tracks it against other currencies.
The yield on the UK 10-year government bond of Gilt, which moves inversely to the price, fell three basis points (0.03 percentage points) to 0.31 per cent as investors bought up safe assets.
The 10-year US Treasury yield fell 10 basis points to 0.655 per cent.