Markets tumble after World Bank warns of global slowdown
Shares and commodity prices tumbled on Wednesday as markets reacted to warnings from the of a slowdown in global growth this year and next.
The FTSE 100 closed down 2.2% to 6388, dragged down by heavy falls for mining companies that supply the copper, zinc and nickel needed by Chinese and US manufacturers.
Glencore dived to a four-year low after losing 9% of its value, Anglo American dropped 8.5% while Kaz Minerals, which mainly mines copper in Kazakhstan, saw its shares dive by 26%.
Standard Chartered, which has a large number of clients in the far east and , lost almost 5% of its value on Wednesday to 886p, pushing its shares down more than a quarter on a year ago.
Poor retail sales data in the US compounded the loss of confidence among traders worried that China, the eurozone and the US still have some way to go before achieving a stable recovery. The Dow Jones index of leading US shares was heading for a fourth straight loss at 18:00 after falling 256 points or 1.5%.
Rob Carnell, an economist at ING Financial Markets, said the month-on-month drop in US retail sales in December showed the US recovery was facing difficulties. “Worryingly, with the US about the only beacon of growth globally, if even this engine is spluttering, then a more substantial market correction than we have already seen may well be on the cards,” he said.
The German Dax also fell, dropping 1% and the French CAC slipped 1.2%. Political instability in the eurozone has also unnerved markets since the announcement of snap elections in raised the prospect of Athens pulling the plug on its membership and potentially triggering a break up of the single currency.
While most investors have accounted for the prospect of another year of stagnation in the eurozone, the continuing credit squeeze in China and lacklustre consumer spending in the US have proved surprising drags on the world’s two biggest economies.
The influential twice-yearly World Bank forecast said late on Tuesday that the US would continue to expand along with the UK, but blamed reduced prospects for growth in the stumbling eurozone, spiralling debts in Japan and weak growth in some emerging economies for a decision to cut its 2015 global growth estimate to 3% from 3.4%.
Speaking to an all-party group of MPs, the deputy governor of the , Sir Jon Cunliffe, said there was a political will inside the eurozone to keep the membership together, but he recognised that should the currency bloc break up it would create a “very major disturbance” in financial markets.
Bank of England governor Mark Carney said he expected the (ECB) to step in to ensure inflation in the eurozone pushes back up to its 2% target and that this mattered to the UK.
The governor, who will have to write a letter to Chancellor George Osborne to explain a fall in UK inflation to 0.5%, said the eurozone has experienced persistently low inflation which was different to the UK experience.
“It is in our interest, without question, that [the eurozone has] stable and predictable inflation consistent with [the ECB’s]mandate, and we have every reason to expect them to take the measures necessary to do so,” Carney said.
The Financial Policy Committee, set up to look for risks to the financial system, had not discussed a break up of the eurozone lately.
The World Bank urged eurozone policymakers to embark on a large-scale programme of economic stimulus to boost demand and prevent a period of deflation that could further undermine consumer and business confidence.
A fall of more than 60% in the oil price since last summer has eased financial pressures on households, but has so far done little to boost spending. It said the ECB should begin to pump funds into the 19-member bloc under a new quantitative easing programme to make credit cheaper.
An adviser to the European court of justice has ruled that a bond-buying programme by the ECB is legal in principle – clearing the way for the ECB to make big purchases of government bonds, spending billions of euros to fight deflation in the eurozone.
The advocate general’s opinion, likely to be endorsed by the court, said bond-buying could be considered legal so long as it was proportionate and the ECB explained its reasons for the action. No upper limits were placed on the scale of the operation that would be allowed.
ECB president Mario Draghi is now expected to launch a substantial quantitative easing-style operation - similar to that used by central banks in the US and the UK - to kickstart the economy. The bond-buying scheme is likely to be unveiled next week in a bid to pull the eurozone out of a potentially dangerous deflationary spiral.