Fears that central banks will have to abandon their zero-interest rate strategies in the face of mounting inflation prompted steep falls on the world’s leading stock markets on Tuesday.
In the UK, the FTSE 100 had its biggest one-day fall since February, closing down 175.69 points at 6947.99 – a drop of 2.47%. The British Airways owner, IAG, was the top faller on the City’s main share-price barometer, down 7.4%, with the engineering companies Renishaw, Melrose and Rolls-Royce also among the the worst performers.
It was a similar story across Europe, with Germany’s Dax closing down 1.8%, France’s CAC down 1.9%, Italy’s FTSE MIB down 1.6% and Spain’s IBEX down 1.7%. The Europe-wide Stoxx 600 had its worst day of 2021, falling by nearly 2%.
On Wall Street, companies that had driven exchanges to fresh highs in recent weeks – such as Apple, Facebook, Amazon and Tesla – were among the biggest losers in morning trading as financial markets took fright at the risk of growing price pressures in the US and China.
After breaking through the 35,000 barrier for the first time on Monday, the Dow Jones industrial average lost 600 points in morning trading in New York.
Half the shares in the tech-dominated Nasdaq index have lost at least 10% of their peak value, with the video conferencing company Zoom – down more than 50% since October – the hardest hit of all.
Shares around the globe fell sharply amid concerns that the rapid growth made possible by mass vaccine programmes in North America and Europe would lead to overheating and an end to the cheap money that has helped boost stock markets.
The turmoil on stock markets began on Monday night with a fall in tech stocks, before moving on to Asia, where the gloom was deepened by a sharp increase in Chinese factory gate prices, and to Europe.
Having triggered the initial sell-off, tech stocks took another battering when the New York markets opened for business amid concerns that Wednesday’s US inflation figures will show cost of living pressures mounting.
Investors have been assuming that central banks will allow their economies to grow strongly without raising interest rates or withdrawing other forms of stimulus such as bond-buying programmes.
The US Federal Reserve, the European Central Bank and the Bank of England have said in recent weeks they are in no hurry to tighten policy but equity traders fear the mood could change if key signs of inflationary pressure – such as labour shortages – proliferate.
The investing magnate Stanley Druckenmiller attacked the Federal Reserve, saying its stimulus programme was inappropriate and endangering the dollar’s status as a global reserve currency.
In an interview with CNBC, Druckenmiller criticised the US central bank for pressing on with its $120bn-a-month bond-buying programme, even though markets had been thriving and the economy recovering.
“I can’t find any period in history where monetary and fiscal policy were this out of step with the economic circumstances; not one,” Druckenmiller said. “If they want to do all this and risk our reserve currency status, risk an asset bubble blowing up, so be it. But I think we ought to at least have a conversation about it.”
Data released by Beijing showed rising global commodity prices feeding through into more expensive manufactured goods. China’s producer prices index rose at an annual rate of 6.8% in April – up from 4.4% in March – and stood at its highest level in three years.
Rising producer prices are an early indication of mounting inflationary pressure, and consumer prices in China were 0.9% higher in April than year earlier, up from 0.4% in March.
Neil Wilson, the chief market analyst at Markets.com, said: “If you are looking for inflation signals, China’s factory gate prices are a pretty good leading indicator. So today’s report could be of concern. Tomorrow’s US inflation numbers are going to be closely watched.”
Nick Hyett, an equity analyst at Hargreaves Lansdown, said: “All things being equal higher inflation implies higher interest rates, and higher interest rates are particularly toxic for companies that promise little in the way of profits today, but rapid growth in the years to come. That’s a pretty accurate description of many tech stocks, and the US market is increasingly dominated by US tech names.”