MARKET MAYHEM MAY LAST ALL YEAR: CITY FOCUS
SHARES in London and the pound tumbled again yesterday as ructions on financial markets around the world engulfed Britain. A cocktail of risks – from a slowdown in China and higher interest rates in the United States, to tensions in the Middle East and nuclear tests in North Korea – has cast a shadow over the global economy at the start of the year.
It is now feared that investors, households and businesses around the world – including the UK – face 12 months of turmoil.
‘The 2016 meltdown has moved into its third day,’ said Joshua Mahony, a market analyst at trading firm IG, adding that the recent ‘hysteria’ has set ‘an ugly precedent for the year ahead’.
The FTSE100 index fell 63.86 points to 6073.38 yesterday, taking its losses in the first three days of trading of 2016 to 2.7pc. It follows a 4.9pc slide in the value of Britain’s blue-chip index last year in what was the worst performance since 2011.
The heady days of last April – when the Footsie closed at an all-time high of 7103.98 – are now a distant memory. The slump is a blow to savers with investments and pensions tied up in the stock market – although experts recommend that anyone investing for the long-term should sit tight.
The latest sell-off in London, which has been echoed across Europe and around the world, was sparked by a bloodbath in China.
Trading in China was suspended on Monday after the CSI300 index plunged 7pc on worries about the outlook for the world’s second biggest economy. Gu Yongtao, a strategist at Cinda Securities, described the rush of investors to sell their shares as a ‘stampede’.
The authorities in Beijing have moved to restore shattered confidence. A temporary ban on large shareholders selling stock on Chinese markets has been extended.
But critics claim that heavyhanded intervention is only making matters worse and that the stock market – which is still up around 60pc over the past two years – is due a correction.
Yang Hai, an analyst at Kaiyuan Securities, said moves to prop up prices merely ‘prolonged the illness’, adding: ‘Further government intervention on a big scale would amount to injustice in a market whose reputation has already been suffering.’
China’s currency is at its weakest level for nearly five years, and the economy racked up the slowest pace of growth for quarter of a century in 2015. The IMF expects growth to slow again from around 7pc last year to 6.3pc this year.
The watchdog’s new chief economist, Maury Obstfeld, this week conceded that the mood among investors was ‘glum’ and warned that China’s economic woes could ‘spook’ the markets again this year.
Worries about China have certainly taken their toll on commodity prices around the world – and in turn countries that rely on raw materials as well as the share price of miners listed in London.
China accounts for around half of global demand for metals such as copper, nickel and aluminium, and sagging demand from the People’s Republic has sent prices tumbling.
Copper – known as ‘Dr Copper’ by traders because it serves as an indicator for the health of the global economy – hit a two-week low yesterday following a 25pc slump last year. Gold, which traditionally rises in times of strife as investors look for somewhere safe to park their cash, hit a seven-week high amid worries about the geopolitical situation. But at less than $1,100 an ounce, it remains well below its peak of nearly $1,900 in 2011.
Oil fell below $35 a barrel for the first time since 2004 as traders dismissed concerns about the rift between Saudi Arabia and Iran and instead focused on the prospect of a relentless rise in global production.
Crude has crashed 70pc since trading above $115 a barrel in the summer of 2014 on the back of weak demand and plentiful supply driven by the fracking revolution in the US and Opec’s refusal to cut production. Simon Henry, the finance boss of Royal Dutch Shell, this week warned oil could fall to $20 a barrel within weeks.
The collapse in the oil price has benefited many households and businesses in the UK, with lower petrol prices and heating bills acting like a tax cut.
But the rout in the commodities markets has taken its toll on savers, pension pots and investors. Mining and oil stocks make up more than 20pc of the FTSE100 and some of the biggest names in the industry have been hammered – dragging the index down with them. Miners BHP Billiton, down 4.9pc, and Rio Tinto, down 4.8pc, were the worst performers on the Footsie yesterday, while the big losers of 2015, Anglo American and Glencore, are down 77pc and 70pc in the last 12 months.
While the fall in commodity prices provides some relief to those countries that import raw materials, such as Britain, it hurts the big exporters such as Brazil, Russia and South Africa. These countries have seen their currencies collapse as their economies plunge into crisis.
The pound has more than doubled in value against the South African rand in the past five years – a boost to English cricket fans travelling there for the current Test series.
The World Bank last night singled out India as a ‘bright spot’ among emerging markets, but added: ‘Growth is projected to slow further in China, while Russia and Brazil are expected to remain in recession.’
In its Global Economic Prospects report, the watchdog warned ‘a faster-than-expected slowdown in emerging economies could have global repercussions’ – including for the UK.
Against this backdrop, and with signs the UK economy is slowing, it is not a surprise to see analysts push back expectations of when interest rates will rise in Britain. The Federal Reserve raised rates in the US for the first time in nearly a decade last month and is expected to raise them again this year – potentially creating more turmoil in emerging markets. The Bank of England could also raise rates in the UK this year, having held them at 0.5pc since March 2009, but it is expected to go slower than the Fed.
The differing outlook, as well as uncertainty over Britain’s future in the European Union ahead of an inout referendum, has sent the pound tumbling to a nine-month low against the dollar of around $1.46.
It all makes for a tumultuous year for investors.
‘When the outlook is poor, anything can generate high volatility,’ said Eric Chaney, head of research at AXA Investment Managers.