European financial markets have fallen sharply on fears that central banks will start tapering their emergency Covid-19 support packages, despite slowing growth in the world economy.
In London, the FTSE 100 fell by 2.3% in morning trading on Thursday, before recovering some ground to close 1.5% down at 7,058, as share prices tumbled across the continent after the US Federal Reserve said it could start cutting back support for the world’s largest economy this year.
In Paris, the French stock market tumbled by more than 2%, while shares fell in Germany, Italy and Spain by more than 1%.
Share prices on Wall Street were flat in early afternoon trading on Thursday in New York, steadying after the S&P 500 index fell more than 1% on Wednesday after the Fed’s intervention.
Fed officials signalled on Wednesday that the threshold for the US central bank reining in its quantitative easing (QE) bond-buying programme could be breached in the final three months of the year, sooner than investors had anticipated.
The Fed is buying $120bn (£88bn) a month in US government bonds and mortgage-backed securities to keep longer-term interest rates low and the bond markets functioning smoothly during the Covid pandemic.
Launched amid chaos in financial markets last year at the onset of the pandemic, after more than a decade of stimulus measures that began during the 2008 financial crisis, the Fed’s latest QE programme has taken the overall stock of assets held by the central bank to more than $8tn.
Indicating that preparations would soon be under way for tapering emergency support, despite the Delta variant of Covid-19 holding back the pace of the global economic recovery, officials suggested economic and financial conditions “would likely warrant a reduction in coming months”.
But while some members of the Fed’s rate-setting federal open market committee judged it could be appropriate to start reducing asset purchases this year, it added: “Several others indicated, however, that a reduction in the pace of asset purchases was more likely to become appropriate early next year.”
Inflation has soared in several advanced economies this year amid supply bottlenecks as the recovery from Covid-19 gets under way. US inflation hit a 13-year high of 5.4%, well above the Fed’s 2% target rate. UK inflation fell from 2.5% to 2% in July, although it is expected to climb to 4% this year.
Much of the rise in prices is expected to be temporary as Covid disruption recedes, while economists caution that the inflation figures reflect prices returning to more normal levels after a historic slump in the first lockdown.
However, signs that the world’s most prominent central bank could begin reducing its support measures sent Asian stocks tumbling overnight, with the sell-off extended on Thursday morning across Europe.
It also comes amid focus on whether the Bank of England or European Central Bank (ECB) will take similar action to scale back bond-buying programmes expanded during the Covid pandemic, with investors awaiting possible updates at the annual Jackson Hole gathering of central bankers taking place next week.
The ECB balance sheet has expanded to more than €8tn (£6.8tn), while the Bank of England has a QE programme worth £895bn. This month a member of Threadneedle Street’s rate-setting monetary policy committee, Michael Saunders, voted to cut short its QE programme rather than continue it until around the end of the year as planned.
Meanwhile, a slump in global commodity prices caused mining stocks to come under pressure, with natural resources companies among the biggest fallers on the FTSE 100 on Thursday.
Shares in mining companies, including Antofagasta, fell by more than 4% and natural resources giant BHP fell more than 2% as a range of global commodity prices tumbled. The global oil price fell by more than 3%, copper dropped more than 2%, and other materials including steel, aluminium and zinc fell.
Other natural resources firms to fall included BP and Rio Tinto, amid concern over weaker demand as momentum in the economic recovery from lockdown faltered in several countries.