FTSE 100 plunges again over China economy fears

Wednesday 26 August 2015

Volatile stock market conditions took their toll again today as the FTSE 100 Index plunged after sharp gains in the previous session.

Early trading saw the index of the top 100 UK-listed companies slump more than 100 points to below 6,000, wiping more than £30 billion off their combined value.

The FTSE 100 had seen a ten-day run of declines - its longest losing streak since 2003 - come to an end on Tuesday, with sentiment boosted by an interest rate cut from China's central bank.

It had fallen by 2.8% on Friday and 4.7% on Monday - the joint-worst session since the downturn in 2009 - on deepening fears over the health of the Chinese economy.

The following day saw a climb of 3.1%, with markets in Europe also up and Wall Street seeing a rally. But US sentiment drained away and by the time New York's Dow Jones Industrial Average closed it had dropped sharply again.

This was compounded by another turbulent session on Asian markets overnight to send the FTSE more than 2%, or around 130 points lower, shortly after opening, before paring back some of the losses.

All but a couple of stocks were lower with mining giants such as Anglo American and Antofagasta - hard hit by China's woes and their impact on commodity prices - again dominating the fallers' board.

Tristan Hanson, Head of Asset Allocation for Ashburton Investments, said: "Financial markets have been rocked by steep falls in global equities. The primary concern seems to be the health of the Chinese economy, in light of both the small initial devaluation in China’s currency earlier this month and a weak manufacturing survey reading last week. This has fuelled concerns over emerging markets and commodities more generally.

"The prospect of a US interest rate hike has also been a lingering worry, although expectations must now be that the Federal Reserve will delay any rate hike unless markets recover swiftly.

"The major question mark is over the strength of the Chinese economy. We expect further stimulus measures will ease downside risk, while recent action to tackle local government debt is a positive development. If a global recession can be avoided (very much our base case), then recent declines in global equities are likely to be temporary, in our view. Emerging markets and commodity producers face considerable challenges, generally speaking, but today’s floating exchange rates provide a buffer against a large negative shock to the underlying economy, compared to the experiences of the 1990s.

“Bouts of abrupt volatility are nothing new and usually bring opportunity for patient investors. We will navigate these turbulent markets as best we can, focussing on where we see the best opportunities over the medium-term while retaining the flexibility to switch course if we deem it necessary.”

Global markets have been rocked in recent weeks by the slowdown in China, the world's second biggest economy, and the depreciation of the yuan.

Recent falls have seen the FTSE 100 fall into "correction" territory, more than 10% off its all-time closing high of 7,104 in April.