The UK’s blue chip FTSE 100 index fell 4 per cent to a low of 5,640 points on Wednesday (20 January). This pushed losses to over 20 per cent since the index’s recent all time high of 7,103.98 – reached in April – and heralded a technical bear market.
A fresh fall in the price of oil was the main contributor to the slide as the price of a barrel of West Texas Intermediate (WTI) crude oil fell through $27 a barrel in intra-day trading on Wednesday.
Stock markets around the globe followed the FTSE’s lead, with Germany’s DAX and France’s CAC 40 down 3.1 per cent and 3.8 per cent heading into the close, while the US’s Dow Jones and S&P 500 indices were down 2.5 per cent and 2.8 per cent by 11.30 am local time on Wednesday.
Commenting on the sell-off, Adrian Lowcock, head of investing at AXA wealth says: ‘The FTSE 100 today dropped into bear market territory, defined as a 20 per cent fall in the value of an index. On its own this doesn’t impact on the economic outlook or profits of companies; however, it does sap investors’ confidence and adds to the concerns that are dominating markets so far this year.
‘Panic, which often accompanies market sell-offs, has been noticeably absent this year. However as markets globally enter bear territory we have started to see panic creep into the market. This can cause investors to act irrationally and increase volatility in the short term.’
FEAR, NOT FUNDAMENTALS
Darius McDermott, managing director of Chelsea Financial Services, adds that further falls in the FTSE 100 can be expected, however he does not forsee a sell-off on the scale of that seen during the financial crisis of 2008, as some have been suggesting:
'Markets seem to be panicking but it's fear, rather than weakening fundamentals, that appear to be dragging markets down.
'Equity markets do appear to be oversold at this point. Could they fall further before they bottom? Quite possibly. But I don't think we are looking at a 2008-type scenario. For me the real issue is the Chinese currency, so I'll liken it more to our own exchange rate mechanism crisis almost 25 years ago,' says McDermott.
The slides followed a disappointing overnight session in Asian markets, which also registered steep losses on Wednesday as Japan’s TOPIX index lost 3.7 per cent, Hong Kong’s Hang Seng fell 4.1 per cent and China’s Shanghai Composite shed 1 per cent.
They also follow a day of bleak warnings from experts at the world economic forum in Davos, which began on Wednesday.
The speakers include Zhu Min, deputy director of the International Monetary Fund, who reportedly warned that global markets have become highly correlated, with investors all crowded into the same positions – which could prove disastrous in a large sell-off.
According to the Telegraph, Min told a panel at the forum: ‘The key issue is that liquidity could drop dramatically, and that scares everyone. If everybody is moving together we don't have any liquidity at all. We have to be ready to act very fast.’
Going into the close of trading the FTSE 100 had recovered some losses to register a slide of 3.5 per cent to 5,673.58 points; however US markets continued to slide while a fresh Asian session overnight could bring more pain for investors.