Shares have fallen heavily on global stock markets as Wall Street jitters about rising US interest rates rippled across the Atlantic to the City and other European bourses.
The Dow Jones Industrial Average closed at 16,945.80 or 1.5% lower amid speculation that America’s central bank, the Federal Reserve, is edging closer to its first increase in the cost of borrowing since before the 2008-09 recession.
With the US dollar surging to a four-year high against a basket of major currencies, traders on Wall Street were also concerned that a rising currency would affect the profits of US companies exporting their goods and services overseas. By contrast, the euro slid to its lowest level in almost two years on speculation that the European Central Bank would be forced to resort to quantitative easing – electronic money creation – in a bid to revive the stagnant and deflation-threatened eurozone economy.
The American economy has shrugged off a weather-affected contraction in the first quarter of 2014, while the eurozone’s sluggish recovery came to a halt in the summer. Signs that policy in the US and the eurozone will be moving in opposite directions affected bond markets, where the gap between the interest rate (yield) on US and German bonds was at its widest in 15 years.
The yield gap is one of the main factors affecting the levels of currencies and the euro dropped to as low as €1.2695 against the dollar – its lowest level since November 2012.
Analysts said the decline in the European single currency had further to go.
Chris Towner, of foreign currency specialists HiFX, said: “The euro is under pressure in the foreign exchange markets and the lower it falls, the greater the fear becomes that this currency has a lot further to fall. Europe is facing some pretty large economic issues – namely slowing growth and prices – which are very hard for the central bank to control.”
The ECB has already responded to the decline in inflation to 0.4% with a surprise cut in interest rates and measures designed to boost bank lending. But further steps are expected from Frankfurt.
Jennifer McKeown, senior European economist at Capital Economics, said: “The ECB now seems to be taking deflation risks more seriously, implementing surprise interest-rate cuts in September and leaving the door wide open to quantitative easing.”
In the City, the FTSE 100 ended 66.56 points lower at 6639.71, a drop of almost 1%. The index of 300 leading European companies was down by slightly more than 1% after a late selloff prompted by the weak opening on Wall Street.
Meanwhile, the Bank of England is to clamp down on insurance companies by subjecting their bosses to tougher scrutiny and forcing them to take steps to bolster their financial strength, Mark Carney has warned.
The Bank governor also warned about the potential for risks building up in the financial system after more than five years with the base rate at a historic low of 0.5% – even as he repeated that the moment rates will rise was getting closer.
Pointing out that the weaknesses of insurers such as AIG were exposed during the 2008 banking crisis, Carney said: “The people running insurance companies should be more clearly held accountable for their actions.”
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