The FTSE 100 suffered its worst daily drop since late March, with US stocks plunging into the red after the Federal Reserve effectively crushed hopes of a quick recovery.
London’s blue-chip index closed down 3.99 per cent after crashing as much as 2.66 per cent this morning.
And US stocks also crashed, with the Dow trading down 4.57 per cent. The S&P 500, which erased its coronavirus losses last week, posted a huge 3.89 per cent drop, while the Nasdaq sank 2.99 per cent.
It comes after Fed chairman Jerome Powell said the US economy would shrink 6.5 per cent in 2020 with an unemployment rate of 9.3 per cent, which has also spooked US investors in early trading.
Powell last night signalled he would hold US interest rates at record lows through 2022, but did not offer fresh stimulus, leaving markets to contend with the economic realities of coronavirus.
That saw the FTSE 100 opening more than two per cent lower. European investors also felt the ill effect of the Fed’s announcement, with Germany’s Dax down three per cent in afternoon trading.
The pan-European Stoxx 600 is down 2.97 per cent and France’s Cac 40 index crashed 3.31 per cent.
“The Fed’s take on the economy, rising infections, and fears of a second wave have triggered the negativity,” said Bill Blain, market strategist at Shard Capital. “Markets are being overly sensitive and volatile on successive waves of good and bad news.”
FTSE 100 and Euro stocks get Fed ‘reality check’
Fiona Cincotta, an analyst at City Index, called the Fed’s announcement a “reality check” for the FTSE 100 and other markets.
She pointed out that it comes on the back of other recent dire economic forecasts. The OECD yesterday predicted the UK will suffer the worst hit from the first wave of coronavirus. It expects the UK economy to shrink 11.5 per cent in 2020.
“Downbeat economic projections from the Fed dashed any lingering hope of a V-shaped economic recovery,” Cincotta said.
“The dovish comments from the Fed, coupled with the depressing outlook came hot on the heels of the OECD’s dire forecasts yesterday. The more draconian measures implemented to curb the coronavirus and the more dependant an economy is on the service sector, the longer the road to economic recovery.”
Markets ‘spooked’ as economic reality catches up
Jasper Lawler, head of research at London Capital Group, warned the Fed’s soft stance left the markets nowhere to go but down as recent stimulus boosts failed to keep them rising.
“The Fed was dovish – maybe even too dovish – and the market looks spooked,” Lawler said before the FTSE 100 opened.
“Nothing the Fed said or did was truly was a big surprise but the rally in shares and run in the dollar has gone on a while without a correction. Hopes for more stimulus explains a lot of the recent optimism so now we are seeing some ‘sell the news’.”
The Fed did keep rates close to zero through 2022, and Powell also pledged to continue its asset purchases “at least at the current pace” over the coming months.
However, Lawler warned these measures signalled a longer term economic recovery, triggering the FTSE 100 to drop.
“The idea of a drawn-out recovery put out by the Fed rather flies in the face of the V-shaped reopening trade that has taken hold in markets,” he said.
FTSE 100 stocks sink as oil prices fall
FTSE 100 stocks slumped in morning trading after the Fed’s dire set of numbers tallied with grim economic forecasts across Europe.
Falling oil prices today also contributed to a decline in keystone FTSE stocks BP and Shell. BP sank 3.2 per cent while Shell outpaced it with a four per cent fall.
And banking stocks and travel stocks were also affected.
Banking giant Lloyds, which is particularly exposed to the UK economy, slumped 5.8 per cent, while Barclays dropped 4.15 per cent. HSBC, blasted over its support for China’s Hong Kong stance in recent days, followed with a 3.8 per cent fall.
Travel stocks were also hit again as investors expressed concern about the UK’s two-week quarantine for travellers. British Airways owner International Airlines Group plummeted 6.8 per cent while budget flyer Easyjet sank six per cent.
Ocado’s £1bn equity raise knocked its share price 6.1 per cent lower by 10.15am as the share issue diluted its stock value.
US stocks tumble as investors digest Fed outlook
US stocks had been approaching pre-coronavirus highs earlier this week. But the Fed meeting has left investors jittery, with the main indices following the FTSE 100’s drop.
The Dow Jones shed 856 points on opening, down 3.2 per cent, falling further to trade down 4.67 per cent by 5pm. The S&P 500 sank 3.89 per cent, while the tech-heavy Nasdaq was dragged down 2.99 per cent.
Investors also had to contend with new figures which showed a further 1.5m Americans had filed for unemployment benefits. It brings the 12-week total to 44m, meaning more than one in four workers have lost a job during the coronavirus crisis.
Friday’s figures for May, which confounded investors expecting 8m more unemployed with a 2.5m rise in employment, had suggested the worst of the coronavirus fallout was behind the US. But as coronavirus cases in the US pass the 2m mark, traders are now fearing a second wave as infections rise as states reopen.
“Stock market gains are slowly getting wiped out as the second coronavirus wave hits the US,” Edward Moya, senior market analyst at forex trader Oanda, said. “New Mexico, Oregon, Florida, Texas, Arizona are having large increases in new coronavirus cases. As the overall cases rise above 2m, Texas had its highest one-day infection total, Florida’s weekly cases jump to highest level, California shows hospitalisations rose to a four-week high. Some of the rises in new cases is also being attributed to the increase in testing.”
Meanwhile, Fed chairman Powell’s commitment to near-zero interest rates until the end of 2022 has sparked concern there will be no quick recovery from coronavirus.
Ronald Temple, head of US equity at Lazard Asset Management, said: “While the worst of the job losses might be behind us, the recent surges in new COVID-19 cases in states such as Texas and Arizona could stall the nascent recovery if not brought under control.”
Moya added: “Financial markets recalibrate after Powell’s downbeat assessment to the outlook and are heading for the sidelines. While the Fed’s policy is set to support a higher stock market, an improving earnings outlook will be required for stocks to get their groove back. The cyclical reopening rotation is over and small-cap stocks could see further downside in the short-term.”