Shares in London plunged for a sixth day and by the largest amount since the Brexit vote as concerns grew that febrile global stock markets, which have lost $4tn (£2.9tn) in value since Friday, were in the grip of panic-selling.

The FTSE 100 slumped 2.6% to 7,141 to wipe out all the gains from this year’s trading and set the index of Britain’s most valuable companies on course for a second week of losses. Investors took fright elsewhere in Europe, with markets in Germany, France and Spain all closing down by more than 2%.

Groupthink about Monday’s ‘correction’ is slightly alarming | Nils Pratley Read more

Stocks also tumbled across Asia earlier in the day. The Tokyo Nikkei 225 index was among the worst affected after shares fell by more than 4% to 21,620, leaving them 12% down on last month’s peak of 24,120.

In New York high-volume trading led to a volatile day. The Dow Jones industrial average ended the day closing up 567 points, or 2.3%, at 24,912. At its lowest point, the index was down 567 points. After two huge sell-offs in succession the result restored a measure of calm.

The US Treasury secretary, Steven Mnuchin, said he was not “overly concerned about the market volatility. I think the fundamentals are quite strong.”

The White House press secretary, Sarah Sanders, also dismissed concerns that the performance reflected any weakness in the US economic picture. “There’s nothing that’s taken place over the last couple of days in our economy that’s fundamentally different than it was two weeks ago and we’re very comfortable with where we are right now,” Sanders said.

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.



The losses in Europe and Asia followed concerns that central banks will increase interest rates this year by more than expected in response to inflationary pressures from surging global economies.

In her last meeting as chair of the Federal Reserve last week, Janet Yellen hinted that stronger than expected inflation could prompt the central bank to review its policy of three rate increases this year. Fed rate-setter Robert Kaplan on Monday repeated the message that three hikes may not be enough to keep inflation in check.

Analysts said figures on Friday from the US showing a strong recovery in average weekly earnings, which many believe could feed through into rising prices, were another trigger for Monday’s panic-selling in New York. The Dow dropped 1,175 points, the largest one-day points fall on record. In percentage terms, at 4.6%, it was the biggest decline in a day since 2011.

Jasper Lawler, the head of research at online trading firm London Capital Group, said the Wall Street sell-off on Monday that was repeated in Asia had “seen confidence evaporate in Europe”.

Brent Schutte, the chief investment strategist at Northwestern Mutual Wealth Management, said the plunge was not caused by inflation fears alone. The markets had been unusually calm since late 2016, he said, and investors were betting that would continue.

“People were positioned for more central bank easing or continued central bank easing, low rates and, importantly, low volatility,” he said. “Corrections are caused by people having to reposition for new environments.”

The Vix index, which measures the volatility of global markets, suffered its highest one-day spike on record on Monday.

Last November Kaplan said stock markets were in danger of being in a bubble that could burst after the value of a broader measure of stocks in New York, the S&P 500 index, hit 135% of US GDP, the highest since the dotcom bubble burst in 1999-2000.



Mnuchin sought to calm fears of fresh falls in stock prices on Tuesday. He said in testimony to Congress that markets were functioning very well and the current market sell-off was just a correction. He said market fundamentals were strong and algorithmic trading was in part to blame for the sudden drop on Monday.

There were no financial stability implications in the recent market moves, he added, although the administration was monitoring the situation. The Dow is still up 20% over the last year while the S&P 500 was 15% higher.

But there was contagion to other markets, with metal prices dropping by more than 2% and the oil price lower for the fourth day. “We read this as a stock-driven sell-off,” ING metals analyst Oliver Nugent said. “It’s market contagion. There’s nothing really happening on the fundamentals front.”

Paul Donovan, chief global economist at UBS, said the stock market fall was likely to be choked off while the global economy remained strong. He said that while inflation could rise by more than expected this year, it was likely to remain muted. “This is not a fundamentals-driven sell-off. It is a technical sell-off that is exaggerated by fund managers trading in volatility.”

He said all the major industrialised nations grew together last year as the recovery in the eurozone, coupled with a resurgent Japan, took hold. “This has happened only seven times in the last 30 years,” he said. “And while this has been a long recovery that inevitably prompts people to ask when is the next recession coming, it has been a mild recovery and it remains on course to continue this year.”