FTSE 100 tumbles after dramatic losses across US and Asia

Sharp rise in US bond yields after strong jobs data is cited as primary trigger for global stock market rout

The FTSE 100 fell sharply on Tuesday, following a dramatic stock market sell-offs across the US and Asia, sparked by inflation fears after strong US jobs data triggered a surge in bond yields.

The UK’s benchmark stock index tumbled 3.5 per cent shortly after the market open before recovering slightly to end down 2.6 per cent, mirroring similar losses across France, Germany and other European markets.

Earlier on Tuesday, Japan’s Nikkei 225 ended the day down 4.7 per cent, marking its worst one-day fall since November 2016 and taking it to a four-month low.

The US benchmark S&P 500 fell by more than 4 per cent on Monday and the Dow Jones Industrial Average lost 4.6 per cent, representing the largest percentage drops in a single day since August 2011. On Tuesday those indices stabilised.

Traders agreed that the primary trigger for the global stock rout was a sharp rise in US bond yields after data out of the US on Friday showed wages increasing at the fastest pace since 2009.

That raised the prospect of higher inflation and, as a result, the possibility of higher interest rates. Markets have been propped up by massive central bank stimulus for years sending stocks to record highs on a regular basis.

Some experts said that investor jitters might also have been enhanced by the recent change in leadership at the US Federal Reserve and the uncertainty this might introduce. Jerome Powell succeeded Janet Yellen earlier this month.

But over the longer run, strategists and analysts agreed that the sell-off was unlikely to lead a major crash.

“The rise in bond yields reflects a return to normal for economic growth and inflation,” said Holger Schmieding and Kallum Pickering, economists at Berenberg bank.

They said that the softer equity markets, for now at least reflect “no more than a correction of the little excess on the upside in recent months”.

“[This] need not change the economic or central banking calculus much,” they said.

James Bateman, chief investment officer for the multi-asset business at fund manager Fidelity International, agreed that “in the long span of financial history, this is not news”.

He said that in the current market environment, “the money is made by keeping your head when others are losing theirs”.

Karen Ward, chief market strategist for the UK and Europe at JPMorgan Asset Management, said that she is not convinced that the moves “represent a major change of economic or market direction”.

“Instead it is a normal shake-out that represents some portfolio re-adjustment and profit-taking after a peculiarly strong start to the year,” she said.

“Unless you believe inflation is really set to return in a meaningful fashion, then you should be confident that central banks will ease off the accelerator but stay away from the brake,” she added. “In which case, the outlook for risk assets remains positive.”

Shoqat Bunglawala, head of the global portfolio solutions group at Goldman Sachs Asset Management described it as a “short-term correction, not a reversal”.

The CBOE Volatility index, which is commonly referred to as the “fear index” because it measures expected near-term stock market volatility, surged by around 20 points to its highest level in well over two years early Tuesday but retreated again later in the session.

The dollar, commonly considered to be relatively safe during times of market upheaval, was steady against most currencies, though slipped slightly against Japan’s yen, which is also considered a safe haven. The pound was broadly steady too.

Oil prices fell by more than 1 per cent early on Tuesday. Like other commodities, oil is priced in dollars making it more expensive when the US currency appreciates against other financial assets. Mid afternoon in London, however, crude was only down around half a percent.