Nervous investors interrupted the global market rally last night, with major indices in Japan, the UK and across Europe turning negative in the face of economic concerns.
In London, the FTSE 100 ended the day down more than 2 per cent at 6,696.79 as a weeks-long rise came to an end, with the index having moved up in every session bar one since the end of April in a seemingly inexorable rise towards the 6930 record hit at the height of the dot.com boom in 1999.
The Paris market also fell more than 2 per cent while the main Italian index, the FTSE MIB, slumped by more than 3 per cent. In Germany, the DAX was down more than 2 per cent.
Chris Beauchamp, an analyst at IG Index, called the sell-off an "undignified rush to the exit", adding: "The mood has switched from greedy to fearful."
A set of negative readings on the state of the European and Chinese economies drove the weakness. In the latter case, data showing an unexpected contraction in Chinese manufacturing activity – the first such reversal in seven months – in May spooked Asian investors. Japan's Nikkei Average, which had been bolstered by prime minister Shinzo Abe's "shock and awe" efforts to kick-start the economy, sank 7.3 per cent in the worst sell-off since the nation was struck by a tsunami in March 2011. In the UK, the FTSE 100's mining contingent was among the worst hit amid fears over waning Chinese demand for commodities.
The sell-off in Europe came as a new survey of purchasing managers in the service sector showed that the eurozone economy was likely to contract once again in the second quarter. Although the figures showed an improvement – the index, produced by the financial data firm Markit, rose to 47.5 in May from 47 in April – they remained below the 50-point mark dividing contraction from expansion. Markit's composite survey of the services and manufacturing sectors also evidenced a contraction, as did a survey focusing on the German private sector.
Some were also concerned by signs that numerous members of the US Federal Reserve's policy-setting Open Market Committee (FOMC) were considering tapering the central bank's stimulus measures, possibly as early as next month, according to the minutes of their last meeting. Although the Federal Reserve's chairman Ben Bernanke struck a more dovish tone during his testimony before the US Congress earlier this week, investors seemed to be focused on the possibility of a reversal in policy, with attention turning to his remarks that the stimulus measures could be scaled back "in the next few meetings" of the FOMC.
That spurred some early profit taking in the US markets. The Dow Jones Industrial Average, for example, fell by more than 120 points before recovering to 15,294.5, down just 0.1 per cent last night as traders welcomed figures showing that the number of Americans filing new claims for unemployment benefits had declined by more than expected last week.
The index was also boosted by a stand-out rally in Hewlett-Packard's shares after an overnight revision to its outlook. The S&P 500 index put in a similar performance, recovering from early low to end at 1,650.1, down 0.3 per cent.