Global shares tumbled again on Wednesday as fears of an economic slowdown escalated and the oil price hit lows not seen since 2003.
European markets collapsed following more sell-offs in Asia. In New York the Dow Jones Industrial Average had lost over 550 points by 1pm ET but staged a late rally and ended the day down 248 points, 1.55%.
In London, the FTSE 100 finished the day down 203 points, or 3.4%, at 5,673, meaning it has fallen more than 20% from its intra-day high of 7122, reached in April last year.
A fall of 20% represents a “bear market” – one where investors expect further sell-offs.
The falls worsened as investors worried about plummeting oil prices. Brent crude oil dropped $1 to $27.7 and US crude headed towards $26 a barrel.
Gloomy predictions about the global economy from delegates at the World Economic Forum in Davos also played a part in spooking markets, alongside comments from the International Energy Agency on Tuesday that the oil market could “drown in oversupply”.
Jack Ablin, chief investment officer at BMP Private Bank, called the collapse “a rest rather than a crash”. He said the decision by the Federal Reserve to raise rates and end its massive financial support of the bond markets last year was finally filtering through to investors.
“We have been building up froth for year with everyone relying on the largesse of central banks,” he said. “Investors don’t feel that the Fed has their back anymore.”
The falls have wiped out earlier gains made Tuesday after figures showed growing oil demand from China, as well as hopes the government would introduce further measures to stimulate the world’s second largest economy ahead of the Chinese new year holidays in early February.
On top of the slide in the oil price, there are continuing concerns about the strength of the global economy. The International Monetary Fund cut its global growth forecasts on Tuesday, blaming a slowdown in China, the falls in commodity prices and the Federal Reserve’s move to start raising US interest rates.
The French CAC, the German Dax and the Shanghai Composite were already in bear market territory, and Japan’s stock market joined them overnight with the Nikkei closing down 3.7%. The CAC lost another 3.5% on Wednesday and the Dax was down 2.8%.
Mining giant BHP Billiton has added to the gloom by suggesting it sees no early recovery in iron ore or coal prices.
William White, chairman of the Organisation for Economic Co-operation and Development (OECD) review committee and former chief economist of the Bank for International Settlements, told the Daily Telegraph that the problems building in the global financial system were now “worse than it was in 2007” and warned that central bankers had “used up all their ammunition”.
A survey for accountancy firm PwC before the Davos meeting revealed that two-thirds of chief executives saw more threats facing their businesses than three years ago, while the head of Swiss banking giant UBS, Axel Weber, added to the angst in Davos by warning that the world was stuck in an era of low growth.
Rebecca O’Keeffe, head of investment at stockbroker Interactive Investor, said:
Ugly, very, very ugly, describes current equity markets, with momentum swinging negative yet again and the bears firmly in control. The fledgling hope from yesterday that markets were on the turn has been quashed by sharp overnight falls in Japan and Asia, which has seen European markets fall aggressively. With every upturn being followed by deeper falls, investors are increasingly wary as it becomes more and more difficult to determine what might happen next.
Oil prices remain under pressure, but the consumer benefits of lower energy prices and higher disposable income have yet to filter through to the wider equity market, which remains unremittingly negative in the face of further prospective asset sales by oil exporting countries’ sovereign wealth funds.
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