The FTSE 100 and US and European stocks tumbled on Monday while the pound slumped after countries banned travel from the UK over fears of a new coronavirus strain.
Adding to the gloom on markets was the impasse in post-Brexit trade talks between the UK and the EU. Rising coronavirus cases in Britain, on the continent, and in the US also dented sentiment.
The storm pushed the FTSE 100 down by 2.5 per cent in afternoon trading, dropping to 6,368 points. The more domestically focused FTSE 250 fell 2.8 per cent.
London’s FTSE 100 was in fact supported somewhat by a tumbling pound, however, which flatters the overseas earnings of big UK companies. Sterling slid 1.5 per cent to $1.331 in the afternoon session.
Prime Minister Boris Johnson on Saturday put London in strict new “Tier 4” restrictions and U-turned on the relaxation of rules over Christmas.
The PM cited a new strain of coronavirus – which could be up to 70 per cent more infectious – as a key reason for his decision.
That new strain has spooked the UK’s neighbours. France has curtailed travel and freight transport from the UK, causing long queues in Kent. Germany, Italy, and Canada are among the other countries to limit transport links with the UK.
FTSE 100 travel stocks suffer
European markets also suffered as investors fretted over the new strain and rising Covid cases.
Germany’s Dax tumbled 2.9 per cent while France’s CAC 40 was also down 2.9 per cent. The Europe-wide Stoxx 600 fell 2.7 per cent.
“A new faster strain of Covid-19 is triggering risk aversion across the board,” said Edward Moya, senior market analyst at currency firm Oanda.
“Thin market conditions are making today’s selloff look more like panic selling.”
Susannah Streeter, senior markets analyst at Hargreaves Lansdown, said: “The nightmare before Christmas is unfolding for firms trading with Europe as Kent is turned into a car park and one by one, more countries announce travel bans.”
On the FTSE, firms connected to the transport industry suffered in particular. British Airways-owner IAG was down 8.2 per cent, while jet engine-maker Rolls Royce also shed 6.7 per cent.
US stimulus deal overshadowed
The slump in markets came despite a long-hoped-for breakthrough in the US, where lawmakers agreed to a $900bn (£680bn) stimulus deal.
Wall Street’s S&P 500 opened one per cent lower. The tech-heavy Nasdaq was down 0.9 per cent and the Dow Jones was off by 0.6 per cent.
Read more: US agrees $900bn Covid stimulus package
Moya said: “Risk appetite did not stand a chance as the virus rages on in Europe and across California.
“The short-term outlook is very bleak, but optimism is still high that by the fall things will closely be back to normal.
“Some investors are eyeing every dip. But that doesn’t mean Wall Street shouldn’t expect three to five per cent weakness before trading is done for the year.”
The dollar rose 0.4 per cent against a basket of other currencies as investors looked for a safe haven and after the signing of the stimulus bill. It helped push down currencies like sterling.
John Hardy, head of FX strategy at Saxo Bank, said: “The US dollar has suddenly gone vertical.” He said there was “no compelling narrative to latch onto other than thin trading and perhaps a sudden hangover from global speculative energy that had simply become very stretched”.
Meanwhile, oil prices fell in anticipation of lower future demand. The global benchmark Brent crude oil price dropped four per cent to $50.20 per barrel. The US benchmark WTI fell 3.7 per cent to $47.20 a barrel.