Global stock markets are sliding to new lows as fears of recession grip investors.
The warning from the US Federal Reserve chair, Janet Yellen, on Wednesday that the world’s biggest economy could be hit by the current turmoil led to a late sell-off on Wall Street, which has followed through to Asia and Europe on Thursday.
The Dow Jones Industrial Average ended down 99 points, or 0.6%, on Wednesday while the Hang Seng slumped 3.8% as Hong Kong traders returned from their new year break – the index’s worst start to the lunar new year since 1994.
Nitin Dialdas, chief investment officer at Mandarin Capital in Hong Kong, told Reuters 2016 would be tough.
I think this is going to be a difficult year for investors and even a fledgling US economic recovery looks to be snuffed out by global markets development.
Charles Li, chief executive of the Hong Kong Stock exchange, was also gloomy:
There is very little good news and continuous bad news and this is a test of market confidence.
But with talk of the Bank of Japan possibly intervening to weaken the yen and some bargain hunting, markets have recovered a little from their worst levels of the day. The FTSE 100 slumped 3%, in early trading, its lowest level in three and a half years, but has recovered to 5600, a 1.27% fall. Germany’s Dax, meanwhile, was down 2% by mid-afternoon and France’s Cac fell 3%. In Italy the FTSE MIB lost 3.3%. Renewed worries about the eurozone and Greece’s bailout measures sent the Athens market down another 1.6%. There are also doubts about Portugal’s ability to stick to its bailout programme, as eurozone finance ministers meet to discuss the latest situation.
Wall Street provided no respite with a 207 point or 1.3% drop on the Dow Jones Industrial Average in early trading on Thursday.
Yellen’s comments have reinforced fears which have been growing all year about a severe downturn in the global economy, with uncertain prospects for the Chinese market, the impact of falling commodity prices on emerging market economies and the growing financial market turmoil. She starts a second day of testimony to Congress on Thursday.
Oil prices continue to slide on fears of a slowdown in demand at the same time as a supply glut, with no sign of Opec agreeing with other producers to limit output.
Brent crude was down 1.6% at $30.34 a barrel on Thursday morning, while West Texas Intermediate, the US benchmark, lost 3% to $26.55.
Commodity companies were among the main stock market fallers, with BP down 5% (not helped by its shares going ex-dividend). The mining group BHP Billiton fell 4% while Rio Tinto, which announced it was cutting its dividend, was down 4.7%.
Banking shares were also under pressure on concerns about the outlook, with their balance sheets likely to be stretched by the current wave of negative interest rates. Sweden became the latest to announce negative rates. The Riksbank said the headline rate would fall to -.50%, from -0.35%.
Even Yellen mentioned negative rates in her testimony on Wednesday, though she was unclear if such a move would be legal, suggesting the Fed had no immediate plans to follow suit. But she was forced to defend December’s interest rate rise amid growing fears about the global economy, and hinted no further increases were imminent.
The Stoxx 600 Banks index, which includes the main lenders in Europe, shed 6.1% to hit its lowest level since August 2012.
Barclays and Standard Chartered fell 6%, while Société Générale was down 14% and Deutsche Bank nearly 7%.
Amid the volatility, investors are looking for havens for their cash, with government bonds and precious metals in demand. Britain’s 10-year government debt has hit an all-time high, with the yield on 10-year gilts, which are the benchmark for UK borrowing, falling to 1.29% on Thursday morning in a wave of buying.
German government bond yields (the interest rate paid) hit a nine-month low, meaning the prices of these bonds have hit the highest level since May 2015. And the yield on US 10-year Treasury bills has hit its lowest in three years, at just 1.62%.
The yen was also in demand, rising against the euro and dollar.
Gold climbed to $1,211 per ounce, its highest since May 2015. So precious metal miners Randgold Resources and Fresnillo were among the few bright spots, up 5% and 4% respectively.
Rabobank’s European strategist, Emile Cardon, told Reuters:
What this shows is that the risk-off mode has come back very quickly and that the worst may still be to come in these markets. What is different to previous times is that the bad news in now coming from everywhere – China, Portugal, the US, the commodity sector, the banking sector. It’s like several smaller crises could combine into one big crisis.
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