US stock markets continued their wild ride on Friday, ending one of the most volatile weeks in trading since the financial crisis as international stock markets continued to fall, spooked by fears of more rapidly rising interest rates.

The Dow Jones Industrial Average, which lost more than 1,000 points on Thursday, rose 30 points on Friday morning as the more broadly based S&P 500 and the tech-heavy Nasdaq also moved into the black only to shortly lose those gains. By noon the Dow was down over 200 points and then rallied to end up over 300 points.

Despite the rally, the Dow fell 5% over the week, one of its biggest one-week drops since the recession.

Quick guide The stock market drop Show Hide Why are stock markets falling? For several weeks, economists and analysts have warned that inflation levels in major economies could increase this year beyond the 2% to 3% that central banks believe is good for developed countries. Official US figures turned those concerns into a sell-off last Friday, after they showed average wage rises in the US had reached 2.9%. The data increased fears that shop prices would soon rise further, increasing the pressure for high interest rates to calm the economy down. Investors then bolted at the prospect of an era of cheap money – which encourages consumers and companies to spend – coming to an end. Over the past month, several members of the US central bank, the Federal Reserve, have argued that three 0.25% interest rate rises scheduled for this year could become four or five. Is there worse to come? There is every prospect that the US economic data will continue to strengthen, increasing the potential for higher interest rates. President Donald Trump’s tax reform bill, which gained approval in Congress before Christmas, will inject more than $1tn (£710bn) into the US economy, much of it in the form of corporation tax cuts. Many firms have pledged to give a slice of the cash to their workers. Decades of flat wages should mean that increases expected in 2018 and possibly 2019 are too small to trigger a reaction from the central bank, but investors are betting rates will rise. As a consequence, stock market jitters could continue. Is it a threat to the global economy? Many developing world economies have borrowed heavily in dollars and will be stung by the higher cost of servicing their debts. On the other hand, a booming US economy will suck in imports from those nations, boosting the incomes of the developing world. However, the eurozone looks unlikely to increase interest rates until its recovery is more firmly anchored. That means the euro will continue to rise in value against the dollar, making it harder for European countries to export to the US.



World stock markets have dropped sharply from recent record highs over the past week. The rout started last Friday after the latest US jobs report was released. The report indicated stronger-than-expected growth in wages, adding pressure on the Federal Reserve to raise rates in order to head off inflation.



In London, the FTSE 100 closed down 1%, while Germany’s DAX and France’s CAC also lost ground. The moves came after falls on the Asian exchanges, with Tokyo’s Nikkei 225 down 2.3% and Hong Kong’s Hang Seng down 3.1%.



The sell-off extended to oil prices, with US crude futures down $1.98, or 3.24%, at $59.18 a barrel on the New York mercantile exchange.

stock market The market’s fluctuations leading into Friday.

Peter Cardillo, chief market economist at First Standard Financial in New York, said the volatility in financial markets was likely to continue. “This is typical of a market that has not yet fully corrected,” he said. “What we are seeing here is uncertainty and investors selling into the rallies.”



A jump in the yield on 10-year US treasury bonds – a key indicator of inflationary pressure and the likelihood of higher interest rates – appears to be a major factor in the latest sell-off.



Early on Friday morning Congress signed a $400bn short-term funding bill to keep the US government open and Cardillo said that move too was likely to add to volatility. The general economy remains robust with strong jobs growth and corporate earning. “But what has changed is that the president has signed a new stopgap bill to reopen government and with that comes a price – a lot of spending. Markets are fearful that increasing deficits mean a more hawkish Fed.”



By betting on calm, did investors worsen the stock market fall? | Nils Pratley Read more

The deal comes after Donald Trump pushed through an overhaul of the US tax system that is expected to cost $1.5tn. The non-partisan Committee for a Responsible Federal Budget calculates that the new funding deal adds $420bn with interest to the national debt over 10 years and that if it and the tax cuts are extended, the US’s annual deficit is on course to reach $2.1tn by 2027.



Marc Goldwein, senior vice-president of the Committee for a Responsible Federal Budget, said the US government was “playing with fire”.

In the near term, he said, it was hard to speculate what drove “every bump and bounce” in the markets but increasing deficits over the long term were likely to have major ramifications for the stock market and the wider US economy.

“These kinds of debt level are unsustainable,” he said.

Stock markets are now 10% down from the highs they reached in late January – a drop known as a correction. Markets would have to fall another 10% for them to enter a “bear market” where pessimism outweighs optimism in the financial markets.