FTSE 100 falls 3% as sovereign debt selloff drives UK government borrowing costs to 15-month high
World stock markets fell sharply on Thursday and UK government borrowing costs hit a 15-month high after the chair of the Federal Reserve gave the clearest signal yet that America's huge stimulus package will be slowed this year.
Fears that China's economy was running out of steam were also blamed as the FTSE 100 hit its lowest level since January in London, amid heavy losses in European markets and in Asia overnight.
On Wall Street, shares picked up where they left off on Wednesday night with the Dow Jones index falling 200 points in early New York trading, adding to Wednesday's 206-point decline as the global sell-off turned full circle.
Government sovereign debt also suffered losses, driving up the yield on Britain's 10-year gilts to 2.29%, a level last seen in March 2012.
Commodity prices also joined in the rout, with the gold price falling below the $1,300 an ounce mark for the first time since September 2010.
Traders blamed the sell-off on Ben Bernanke's prediction on Wednesday night that the Fed will start to ease its bond-buying programme later this year, having seen evidence that the US economy is recovering.
"Ben Bernanke has put the cat well and truly among the pigeons with his statement that asset purchases would begin slowing by the end of this year," said Yusuf Heusen, sales trader at IG. "It does feel as if the Fed chairman has pulled the rug from underneath the stock market rally, and he certainly seems to have dealt a killer blow to gold."
In late trading the blue-chip FTSE 100 was down 201 points, or 3.1%, with every share losing ground. Mining stocks led the fallers, following disappointing data from China where factory output fell for the second month running.
Matt Basi, head of trading at CMC Markets in London, said rumours of a clampdown on lending in China had also hit share prices.
The Fed is currently buying $85bn (£55bn) of US debt, and mortgage-backed securities, each month in an attempt to bring down America's unemployment rate. That regular surge of liquidity has helped reassure the markets, and also been blamed for fuelling asset prices in developing markets.
Amid the sell-off, the Indian rupee hit a record low against the US dollar, prompting the country's chief economic advisor to hint at government intervention to strengthen the currency.
"We aren't short of actions or instruments as and when the need arises," Raghuram Rajan told reporters in New Delhi. "We do not like volatility and will take actions when necessary."
Bernanke had already suggested last month that the Fed would start to slow, or 'taper', its bond-buying programme. But the Fed chair's upbeat assessment of the US's economic prospects appeared to catch investors off-guard.
"Virtually every financial asset has been sold. Equity, credit, bonds, commodities; all have suffered," said Mike Ingram, market strategist at BGC Brokers. "Ominously, the bonds of Europe's troubled periphery seem to have been singled out for particular punishment," Ingram added.
The yield, or interest rate, on Spanish, Greek, Italian and Portuguese shares all rose sharply.
The increase in the yield on Britain's 10-year gilts implies that it will cost more to service Britain's debts, with the country on track to borrow £120bn this year.
The French and German stock markets also fell by over 3%. Overnight, Japan's Nikkei fell 1.75%, while China's CSI300 slid 3.3% to a six-month low, and the Seoul stock market hit its lowest level in nearly 11 months.
Economist Paul Krugman suggested that Bernanke could be making a tragic mistake by preparing to 'taper' the Fed's bond purchases now, with employment levels still weak. He compared it to "snatching away the punch bowl before the party even starts".
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