The FTSE 100 tumbled in afternoon trading to close 2.5 per cent lower lower as a spike in tensions between the US and China shook investors.
London’s main stock index closed at 6,061 points. It nonetheless finished higher for the week, with many analysts saying investors were profit-taking today.
US stocks also fell, although their decline was less pronounced, having dropped on US-China tensions yesterday. The S&P 500 index was 0.4 per cent lower in morning trading. The Dow Jones was down 0.7 per cent.
Investors also sold shares on the continent, with the pan-European Stoxx 600 down 1.5 per cent. Germany’s Dax was 1.6 per cent lower.
Investors were jittery after Trump announced he would hold a press conference about China later today.
It followed the decision by China’s parliament to approve the security law for Hong Kong which many fear that it could lead to the end of the autonomous city’s special status.
Trump could announce economic measures to try to punish China. That could threaten to derail the global economic recovery from coronavirus.
“Animosity between the two governments has been growing lately as the US are not happy with the way the Beijing administration is treating minority communities,” said David Madden, market analyst at trading platform CMC Markets.
Travel-linked firms drag down FTSE 100
Internationally focused firms dropped sharply on the FTSE 100. Rolls Royce ended 15 per cent lower after a bruising day. Joshua Mahony, senior market analyst at trading platform IG, said: “Rolls-Royce has come under significant selling pressure this morning.”
He said this was because the stock was “hit by a double-whammy of a substantial hedge fund sale and S&P [credit rating] downgrade to ‘junk’”.
Airline operators Easyjet and IAG both shed more than six per cent of their value. Investors appeared to second-guess the recent recovery in the industry’s stocks.
“While the aviation sector may pick up amid a rise in holiday bookings, the possibility of new airplane orders appears to be a step too far for now,” Mahony said.
Chris Beauchamp, senior market analyst at IG, said that Trump’s afternoon tweet, which just read “CHINA!” spooked markets.
“Market action this afternoon seems to have pivoted off a single-word tweet from the US president,” he said.
“Given the president’s record we can probably guess that it is not likely to be a particularly positive statement.”
Markets end strong week on a low
In the US, investors were nervous ahead of Trump’s press conference. As on the FTSE 100, many of the hardest-hit Wall Street shares were industry-focused companies that could suffer from another freeze in relations with China.
On the Dow Jones, Boeing dropped more than three per cent. Aerospace conglomerate Raytheon Technologies and Caterpillar were among the biggest fallers.
“If Trump decides to proceed with mild action, like travel and/or financial sanctions on Chinese officials, we don’t expect equities to tumble much,” said Charalambos Pissouros, senior market analyst at JFD Group.
“In case the US’s response is a bolder one, like scrapping the ‘phase one’ trade deal and/or imposing fresh tariffs, the slide in risk assets could be larger.”
Madden said: “Some dealers are sitting on their hands as they are afraid the Donald might go on a tirade against the Chinese government.”
“All things considered, the indices are holding up alright, but the absence of buying is notable, seeing as US markets were powering ahead earlier this week.”
Oil rally runs out of steam
Oil prices were lower, with the US benchmark price down 0.2 per cent to $33.60 per barrel. Brent crude was 0.9 per cent lower at $35.
Craig Erlam, market analyst at currency platform Oanda, said: “The oil price recovery has well and truly stalled, with WTI and Brent off a few percent today.” It came after data showed another large inventory build on Wednesday.
“It’s been some recovery for crude prices so a period of profit taking can only be healthy,” Erlam said. “With economies gradually reopening, there’s plenty more time for upside, assuming it all goes to plan of course.”
Government bond prices rose, signalling that investors were buying up safe assets as they sold equities.
Despite today’s falls, stock markets will end the week higher than where they started. Investors have been cheered by countries’ moves to lift coronavirus lockdowns.
Mahony said that “fears over the impending US reaction to Chinese actions in Hong Kong [are] driving traders to bank their profits ahead of the weekend” today.