Global stock markets came under renewed pressure on Friday in a widespread sell-off prompted by fears of a global economic slowdown, tensions in the Middle East and the spread of the Ebola virus.
After another volatile week, the FTSE 100 slumped to its worst level since 9 October last year, falling 91.88 points or 1.4% to 6,339.97. The index fell for the third week in succession for the first time since March.
Since its recent peak of 6,878 in September, the FTSE has dropped about 8%, close to the 10% level which stock market analysts label as a correction.
Meanwhile Germany’s Dax dropped 2.4% on Friday to 8,788 and France’s Cac closed 1.6% lower at 4,073. After European markets had closed, Finland was stripped of its top-notch triple A rating and France warned it faced the risk of further downgrade to its AA rating. S&P was the first of the major ratings agencies to cut Finland’s prized rating because of its fear the country could suffer “protracted stagnation” and its exposure to Russia and the eurozone. Only Germany and Luxembourg remain triple A rating in the eurozone.
On Wall Street the Dow Jones industrial average, which lost 334 points or nearly 2% on Thursday, made an uncertain start and closed down 0.69% on the previous day.
Emphasising the uncertainty facing US investors, the Vix volatility index jumped 8% to its highest level since December 2012.
Jasper Lawler, a market analyst at CMC Markets UK, said European markets had been hit by US investors liquidating their holdings. He said: “This week has seen the biggest weekly US outflow from European stocks in two months and total European assets held by US funds have dropped to $40bn (£25bn) down from nearly $50bn in June, according to Lipper data.”
This week’s market declines followed news that the International Monetary Fund had cut its global growth forecasts for 2014 to 3.3% from the 3.7% it was predicting in April. While it expects a pickup to 3.8% in 2015, it warned its predictions could still be too optimistic.
Construction figures on Friday emphasised the fragile state of the UK economy, with a sharp fall in new housebuilding in August sending output down 3.9% compared with July, the first fall for 18 months.
UK trade data showed the deficit falling from £3.1bn in July to £1.9bn in August, though mainly as a result of a substantial drop in imports from non-EU countries rather than the hoped-for surge in exports.
But it is the outlook for China which has been preoccupying investors recently, given the country is the driving force for much of the global economy. Recent data raised fears of a slowdown, with a disappointing service sector survey this week adding more evidence.
Worries about the eurozone came to the fore this week after a poor set of industrial production figures from Germany was swiftly followed by news of a 5.8% fall in its exports, compared with expectations of a 4% decline. The fall was the biggest since January 2009, and showed the effects of the sanctions on Russia over Ukraine, as well as the wider slowdown in the eurozone.
Germany’s economy shrank by 0.2% in the second quarter, so a second consecutive contraction in GDP in the third quarter would tip it into a technical recession. There were reports that the government would next week lower its estimates for GDP growth to 1.2% for both 2014 and 2015, from 1.8% for this year and 2% for next year.
Mario Draghi, the president of the European Central Bank, added to the gloom on Thursday by saying in Washington that the eurozone recovery was running out of steam.
Analysts are nervous that Draghi’s plans to stimulate the flagging eurozone economy with a bond-buying programme have still not been fully implemented and may not be sufficient anyway. Other central banks, notably the US Federal Reserve, have been gradually turning off the money that has been supporting the global markets for the past six years since the global crash which followed the collapse of Lehman Brothers.
The prospect of this support ending, and of interest rates rising, had already started to unsettle markets. There was a brief respite from the week’s slide when the minutes of the latest Federal Reserve meeting suggested it was in no rush to raise rates, but this proved short-lived.
News that the firsta case of Ebola outside west Africa had been confirmed in Spain added to the market pessimism, hitting the travel and leisure sectors particularly hard. In the two days following the Spanish case, £2bn was wiped off the value of leading UK airlines, travel agents and hotels before their shares stabilised.
On top of that came the current geopolitical tensions, with air strikes on Isis, the Ukraine situation and the repercussions of the recent protests in Hong Kong.
The prospect of a global slowdown also hit oil prices. With oversupply and falling demand, Brent crude fell more than 3% over the week, standing at just over $89 a barrel on Friday.
But gold, seen as a haven for investors in turbulent times, has added nearly 3% since Monday to $1,220 an ounce, its best weekly performance since the end of June.
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