Panicked investors sought refuge in the safe havens of gold and government bonds on Thursday as a fresh spasm of global selling sent share prices crashing in Asia, Europe and North America.
Banks and companies exposed to lower commodity prices were among the biggest losers in London, where the FTSE 100 Index fell by 135 points, a drop of more than 2%. An index of Britain’s banks fell to levels not seen since the depths of the post-Lehman Brothers recession in early 2009.
London’s fall, which wiped £35bn off the value of the FTSE 100, was part of a global rout that began in Tokyo, spread to the major bourses of Europe and then to Wall Street, further unsettled by another drop in oil prices and news of aregulatory investigation into the affairs of aircraft manufacturer Boeing.
The Dow Jones Industrial Average fell 255 points, or 1.6%, to 15,660. The S&P 500 fell 1.2% and the Nasdaq Composite lost 0.4%. All three had bounced back late in the day from sharper falls but, again, financial stocks were big losers. Financial shares in the S&P have lost roughly 18% so far this year.
Janet Yellen, the chair of the Federal Reserve, did little to lift spirits when she said that negative interest rates were “not off the table”. Until this week, investors had assumed that the US central bank would raise borrowing costs steadily this year after moving for the first time in almost a decade in December.
The International Monetary Fund said it was concerned about the recent sharp declines in the share prices of European banks, because a healthy banking sector was needed to underpin economic growth.
The interest rate – or yield – on a 10-year UK government gilt declined to below 1.3% at one stage, a record low, as investors anticipated a prolonged period of sluggish growth, weak inflation and low interest rates.
Investors fear that although banks have bolstered their capital positions since the last crisis, they will start to report losses on non-performing loans to energy and property companies affected by faltering growth, while their profitability will also be hit by negative interest rates. HSBC shares closed at their lowest level since the spring of 2009, when the global recession bottomed out.
The three biggest fallers on the FTSE 100 were all financial institutions – the Prudential, Aberdeen Asset Management and Barclays – which were all 7% lower.
But their losses were eclipsed by French bank Société Générale, which lost 13% of its value after admitting that “headwinds” could knock its profits this year.
On a day of dramatic market moves:
- Sweden’s central bank pushed its interest rate further into negative territory, taking it to minus 0.50% from minus 0.35% “Uncertainty regarding global developments is still high, with low inflation and several central banks pursuing more expansionary monetary policy,” the Riksbank said.
- Deutsche Bank, a major focus of the market’s concerns, resumed a slide which had temporarily paused on Wednesday and closed 6% lower, while shares in Credit Suisse fell to levels last seen in 1989.
- Gold hit a year high of about $1,235 an ounce.
- Oil prices fell in New York by 4% to $26.34 a barrel, the lowest level in 13 years.
- Eurozone finance ministers tried to soothe concerns with Finland’s Alex Stubb saying “we should be pretty relaxed” about the volatility in bank shares.
- Stock markets across Europe all closed down: the CAC in France dropped 4%; Germany’s DAX lost 3%; the Italian MIB fell by 5.5%.
Asia set the tone for trading early in the day. With the Chinese stock market still closed for the holiday, Hong Kong dropped 4% while the Japanese yen continued to rise against the dollar, sparking rumours that the central bank had intervened in the market.
Steen Jakobsen, chief economist at Saxo Bank, said: “This week may go down in financial history as the week when central bank planning died – the 2016 version of the fall of the Berlin Wall.”
With much of the focus on the banking sector, Sir Jon Cunliffe, one of the deputy governors of the Bank of England, said that “we are not there yet” in being able to deal with the collapse of any international bank.
The scale of the problems have left investors groping for reasons for the loss of confidence that has plagued the markets since the start of 2016, giving them the worst start to the year on record. While some have blamed fears of sluggish economic growth and worries about the impact of prolonged low interest rates on banks and other sectors, some investors are looking at other factors.
Saker Nusseibeh, chief executive of Hermes Investment Management, said: “There is no fundamental reason for the market to be in this state … We think it’s because the market is dominated by people who do not invest on fundamental factors.”
The use of financial instruments that track markets, such as exchange traded funds and commodity trading advisors, was part of the reason for the phenomenon, he said. “It is creating a situation where the market is separated from reality … It’s Alice in Wonderland. They are turning stock markets into casinos.”
Economists warned that the falls in stock markets could indicate a downturn for economies. “Over recent years, equity prices have been a fairly reliable and timely guide to the performance of the real economy,” said experts at CapitalEconomics. “On past form, the declines in eurozone equities over the past year look consistent with annual contractions in GDP of more than 1%.”
They said they did not expect the eurozone to contract this year but warned: “We estimate that the decline in equity prices this year has knocked almost €300bn, or 1.5%, off household financial wealth, which could have a large impact on consumer spending.”