Stock markets around the globe have plunged into the red, amid fears that weaker growth will leave banks exposed to a fresh economic slowdown.
Investors dumped shares and piled into the safe havens of gold and government bonds in a resumption of the panic conditions that marked the start to trading in 2016.
With some analysts rekindling memories of the crash of 2008, shares in London closed only just above their lowest level in four years after a 159-point fall sent the FTSE 100 index 2.7% lower to 5689 points. Bourses in Frankfurt and Paris had even worse days, both closing down more than 3%. The Greek stock market plunged to its lowest level for 25 years.
US stock markets seemed set for a similar sell-off but managed a late rally to pare back on some of the day’s losses.
Much of the focus was on the banking sector, where falling share prices reflected the increasing riskiness of the sector.” In the US Goldman Sachs lost 4.6%, Morgan Stanley 6.9%. Falling banking shares accounted for a fifth of the fall in the FTSE 100.
Shares in Barclays and Standard Chartered were briefly suspended on the London Stock Exchange – although the biggest loser was Deutsche Bank, listed in Frankfurt, which lost almost 10% during the day.
“The fundamental picture is clearly softening,” said Owen Callan, senior analyst at Cantor Fitzgerald. “People are worried about the global economy and particularly now we are beginning to look at the banks.
“You are seeing more and more people saying: ‘Is this 2008 again?’ Maybe not quite as severe, but do we need to be worrying about the banking sector and risk assets on a bigger level?”
Bank shares have been under pressure since the start of the year as concerns about the global economy have knocked sentiment. But Monday left them nursing further losses. Deutsche – Germany’s biggest bank – and Credit Suisse of Switzerland have now lost a third of their value since the start of the year.
Deutsche, which last month reported its first full-year loss since the 2008 crisis, was under the microscope after the cost of buying insurance against default rose sharply. “While we think the market is overstating the risks, and the panic is not justified by the fundamentals, it is hard to see a catalyst that will turn sentiment round in the near term,” said analysts at CreditSights.
Investors raised fears that Deutsche might not be able to make payments on specialised bonds issued in 2014 that can be converted into shares during times of crisis. This was despite reassurance from the bank’s finance director only last month that such payments would be made.
Bonds such as these are relatively new and investors have been attracted to them because they pay relatively high coupons, or returns, to investors.
The cost of buying insurance against default, measured by credit default swaps, hit a two-and-a-half-year high, although banks are holding more capital than they were before the 2008 crisis.
In the UK, the stock market turmoil has already prompted George Osborne to delay an offering of Lloyds Banking Group shares to the public. The shares are down almost 20% this year. Shares in the other bailed out bank, Royal Bank of Scotland, are down nearly 25% since the turn of 2016.
Traders said concerns over bank margins in a negative interest rate environment were hurting the bank sector after central banks in Europe and Japan hinted in January that already low interest rates could be cut further.
Worries over a possible British vote to leave the European Union later this year were also weighing. HSBC, which is heavily exposed to emerging markets, dropped to its lowest level since 2009, the year that marked the low point for the global economy.
The ratings agency Standard & Poor’s said: “Central banks are turning to negative rates in order to combat deflationary pressures and currency appreciation. But simultaneous independent efforts to depreciate could result in an undesirable ‘race to the bottom’ among central banks.”
An early sell-off in the City was amplified when trading began in New York with a sharp drop in all three of the US’s leading share-price indicators. The Dow Jones industrial average fell by more than 300 points in the first three hours of trading on Wall Street, dropping below the 16,000 level.
The tech-dominated Nasdaq index was down by more than 2%, with shares in Facebook, Google and Amazon all down sharply. Oil prices fell by 2% after talks between Saudi Arabia and Venezuela on possible production curbs ended inconclusively. Brent crude was trading just under $33.50 a barrel.
Laith Khalaf, senior analyst at City firm Hargreaves Lansdown, said: “Markets are clearly worried about a global economic downturn at a time when central banks have little dry powder left to fight off recessionary forces.
“The collapse in the oil price has been a big shock to the financial system and its effects are still being absorbed by international stock markets, in particular the implications for global demand. Financials have been really badly hit of late, and in a sign of how dire things have got, some European banks are trading lower than they did during the depths of the financial crisis. There doesn’t seem to be much justification for such a dismal outlook, but markets appear to be stuck in a negative feedback loop at the moment.”