The FTSE 100 fell sharply on Tuesday morning, following dramatic sell-offs across the US and Asia, sparked by inflation fears after strong US jobs data triggered a surge in bond yields.
The UK’s benchmark stock index tumbled 3.5 per cent shortly after the market open before recovering slightly, mirroring similar losses across France, Germany and other European markets.
Mid-morning, the FTSE was around 2 per cent lower.
Earlier on Tuesday, Japan’s Nikkei 225 ended the day down 4.7 per cent - its worst one-day fall since November 2016 - and taking it to a four-month low.
The US benchmark S&P 500 fell by more than 4 per cent on Monday and the Dow Jones Industrial Average lost 4.6 per cent. Those represented the largest percentage drops in a single day since August 2011.
Traders agreed that the primary trigger for the global stock rout was a sharp rise in US bond yields after data out of the US on Friday showed wages increasing at the fastest pace since 2009.
That, in turn, raised the prospect of higher inflation and, as a result, the possibility of higher interest rates. Markets have been propped up by massive central bank stimulus for years sending stocks to record highs on a regular basis.
Some experts said that investors could also be jittery as a result of a change of leadership at the US Federal Reserve and the uncertainty this might introduce. Jerome Powell succeeded Janet Yellen earlier this month.
But over the longer run, strategists and analysts agreed that the sell-off was unlikely to lead a major crash.
“The rise in bond yields reflects a return to normal for economic growth and inflation," said Holger Schmieding and Kallum Pickering, economists at Berenberg bank.
They said that the softer equity markets, for now at least reflect "no more than a correction of the little excess on the upside in recent months".
"[This] need not change the economic or central banking calculus much,” they said.
James Bateman, chief investment officer for the multi-asset business at fund manager Fidelity International, agreed that "in the long span of financial history, this is not news”.
“Yet in a world where the concept of a 'correction' almost feels alien and where equities felt like an unstoppable one-way bet for a while, the normality of a setback can feel more painful,” he added.
He said that in the current market environment, “the money is made by keeping your head when others are losing theirs”.
The CBOE Volatility index, which is commonly referred to as the “fear index” because it measures expected near-term stock market volatility, surged by around 20 points to its highest level in well over two years.
The dollar, commonly considered to be relatively safe during times of market upheaval, was steady against most currencies, though slipped slightly against Japan’s yen, also considered a safe haven. The pound was broadly steady too.
Oil prices fell by more than 1 per cent. Like other commodities, oil is priced in dollars making it more expensive when the US currency appreciates against other financial assets.
