(Update) The FTSE 100 fell heavily after data revealed the US economy had suffered its sharpest contraction since the Great Depression in the second quarter as the coronavirus pandemic gathered pace.
Markets were also spooked by the prospect of constitutional turmoil as US president Donald Trump raised the possibility of delaying the US election, repeating claims that the ballot would be affected by fraud due an increase in mail-in voting.
Donald Trump tweeted: ‘With Universal Mail-In Voting (not Absentee Voting, which is good), 2020 will be the most INACCURATE & FRAUDULENT Election in history. It will be a great embarrassment to the USA.’
The US president does not have the unilateral power to delay the election on 3 November, which would have to be approved by Congress, according to Reuters.
The comments drove US treasury yields to their lowest level since early March, with 10-year treasuries falling 4.1 basis points to 0.5397%.
The UK blue chip index extended its earlier 0.7% decline, dropping 186 points, or 3%, to 5,946, with just five companies left in positive territory in mid-afternoon trading. It later recovered, still below 6,000, 141 points and 2.3% down at 5,990.
On Wall Street the US S&P 500 dropped 41 points, or 1.2%, to 3,218 on opening, after the Commerce Department announced GDP had declined at an annualised rate of 32.9% last quarter. The fall was the steepest since records began in 1947 and three times worse than the previous all-time drop of 10% in 1958’s second quarter.
It later recovered to trade 0.7% off as investors looked forward to quarterly results from Apple, Amazon, Alphabet and Facebook.
In Europe, data showing Germany suffered its worst second quarter contraction since the 2008 financia crisis, hit the country’s DAX 30 which plunged 3.5%. France’s CAC 40 slid 2.1% and Italy’s FTSE MIB dropped 3.3%.
UK ‘mid cap’ stocks also slid further, but again not as far as the top 100, as the FTSE 250 dropped 306 points, or 1.8%, to 16,941.
‘The markets have been bracing themselves for the worst ever set of US quarterly GDP numbers and in that regard our expectations have been fulfilled,’ said Helal Miah, investment research analyst at The Share Centre.
‘This was not as bad as the feared 34.5% fall that was expected, along with the dovish stance taken by Jerome Powell last night we’ve seen a muted reaction to the US dollar as well at the stock market so far. This though comes on a day when the stock market is seeing a bit of a pullback on concerns of a stuttering recovery.’
‘Today’s data can only increase the pressure on the Republicans and Democrats to reach an agreement on extending the government stimulus measures which expire tomorrow. That said at the end of the day, as Fed Chair Jay Powell emphasised on Wednesday, the path of the economy hinges on the course of the virus,’ said Rupert Thompson, chief investment officer at wealth manager Kingswood.
On the FTSE, Lloyds (LLOY) led the fallers, with its shares falling 7.1% to 26.4p, as the bank’s poor half-year results weighed on other financials.
Insurer Legal & General (LGEN) fell 6.9% to 209p, while Standard Chartered (STAN) sunk 6.5% to 393p, as it also came out with results for the first half of the year which showed a sharp increase in provisions for bad loans.
(10:24)FTSE 100 falls as Lloyds swings into red
More bad banking news pulled the FTSE 100 lower after Lloyds (LLOY) swung into the red, while the Federal Reserve’s added to investors’ woes with a warning over the US economy.
The blue chip index dropped 48 points, or 0.7%, to 6,083 as Lloyds warned it had made provisions to £3.8bn of bad bank loans, the day after peer Barclays (BARC) disappointed markets with a £1.3bn provision.
AJ Bell analyst Russ Mould said the banking sector had ‘its hands tied behind its back’ and Lloyds results are ‘thoroughly miserable and it is certainly going to be a tough period ahead’.
Lloyds’ poor results had a knock on effect on financials, with insurers also taking a hit: Prudential (PRU) fell 3.8% to 288p, Legal & General (LGEN) declined 3% at 218p, and Aviva (AV) was down 2.7% at 270p.
There was some good news from Royal Dutch Shell (RDSA), which managed to avoid a quarterly loss but said asset values had been impacted by a £17bn impairment charge.
Spreadex analyst Connor Campbell said the oil giant posted a $18bn net loss in the second quarter but ‘was saved by an adjusted second quarter net income of $638m, a huge 82% decline year-on-year, but still lightyears away from the $664m loss forecast by analysts’. The shares were trading up 0.2% at 13p.
The US Federal Reserve’s latest meeting failed to provide any bright spots for investors, as it warned the US economy is stalling as coronavirus infections continue to rise. It kept interest rates on hold at between 0% and 0.25% and committed to keeping them low as the economy recovered.
While there has been increases in economic activity and employment, policymakers warned ‘the path of the economy will depend significantly on the course of the virus’.
Fed chair Jerome Powell said ‘it looks like the data are pointing to a slowing in the pace of the recovery’.
Seema Shah, chief strategist at Principal Global Investors, said the meeting contained ‘no surprises’. She said concerns about a second wave and the impact on the labour market and consumer spending will be ‘compounding if Congress cannot agree on a new fiscal stimulus package before summer recess’.
Ipek Ozkardeskaya, analyst at Swiss Quote, said the worse the economic conditions get in the US, the better it could potentially be for equities.
‘We are back to those days where bad economic news is perceived as good news for the market as deteriorating financial conditions mean more monetary and fiscal support, a longer period of cheap liquidity which can only result in a bigger balloon in equity prices,’ she said.