The FTSE 100 has fallen to a three-year low as global markets dropped sharply again, with investors unnerved by a further plunge in oil prices and the prospect of a US interest rate rise this week.
In volatile trading, London’s leading index lost 78.72 points or 1.32% to 5874.06 on Monday, its lowest closing level since early December 2012 and its eighth successive daily decline.
As recently as April the index had touched an all-time high of 7103, boosted by low interest rates and the stimulus measures implemented by central banks – the US Federal Reserve in particular – to boost the flagging global economy and hopes of a solution to the crisis in Greece.
But since then, with commodity prices slumping on weak global demand and borrowing costs likely to begin rising, markets have been heading in the other direction.
Germany’s Dax dropped 1.94% while France’s Cac closed down 1.68%. An early boost from better than expected industrial production and retail sales figures from China over the weekend proved shortlived.
On Wall Street the mood was equally uncertain, with the Dow Jones Industrial Average 130 points lower in early trading before recovering to be virtually unchanged by noon.
In the oil market, Brent crude came within a whisker of its lowest level for 11 years, falling as low as $36.33 a barrel before recovering to $38, up 0.4%. Seven years ago, during the worst of the financial crisis, Brent touched $36.20 a barrel. Its lowest level prior to that was in the middle of 2004 as the market recovered from the invasion of Iraq. West Texas crude dropped below $35 a barrel before recovering to $36.20.
The recent oil price slump came after Opec’s failure to agree production cuts earlier this month, which renewed fears of a global supply glut at the same time as demand slowed, especially from key markets such as China.
Reports on Monday suggested that Iran was planning to boost production in preparation for the lifting of sanctions early next year. Reuters said the country was planning to ship 1.26m barrels a day, according to industry sources.
Sarosh Zaiwalla, a lawyer with a number of Iranian clients, said: “With the lifting of sanctions on Iran now imminent, it is not surprising that oil prices have hit record lows. With a view to make up the lost market share it suffered under the sanctions regime and re-establish itself as a world leader in oil production, the Iranian government has committed to implementing a significant increase of 1m barrels within just a week of sanctions being lifted.”
As well as the oil price fall, markets have come under pressure ahead of this week’s Federal Reserve meeting where the central bank is widely expected to raise interest rates for the first time in almost a decade. Economists are concerned that greater borrowing costs could have a knock-on effect on emerging markets, which have benefited from the Fed’s cheap money policies.
The junk bond market has also come under renewed pressure ahead of any Fed move, with one fund, Lucidus Capital Partners, reportedly liquidating its positions. It was established in 2009 and raised $500m (£330m) to invest in high-yield bonds.
Comments from the European Central Bank president, Mario Draghi, on Monday repeating that the bank would consider further stimulus measures if necessary did little to enthuse the market. Investors were hoping for a clearer signal of the bank’s intentions, and the disappointment helped push the euro sharply higher, adding more pressure on share prices.
Joshua Mahony, market analyst at IG, said markets should be prepared for further major swings. “Oil prices continue to dominate trading, with the FTSE 100 exhibiting major volatility and unpredictability in a largely mixed session [on Monday].
“Arguably, the correlation between oil prices and the FTSE is as strong as it ever has been, and with oil breaking towards multi-year lows, this is not a good sign for stocks. The positive influence felt by strong Chinese data overnight is all but forgotten by now, and instead the feeling is that markets are nervously preparing for the Fed decision. For that reason, the choppiness seen [on Monday] could provide a format for future trading as we head into Wednesday’s announcement.”