Shares on the London Stock Exchange suffered the worst drop in more than a year as stock markets across the world continued to suffer a meltdown.
In London, the FTSE 100 index opened 2.3 per cent lower while the FTSE 250 featuring more UK-focused companies fell more than 3 per cent.
In Europe, the Euronext 100 tumbled 3.5 per cent and Germany’s Dax dropped 3 per cent.
Stock markets in Asia suffered a rout, with Japan’s main benchmark Nikkei index suffering its worst day since Black Monday in 1987, falling 13 per cent.
In South Korea, its main dropped more than 9 per cent, while Taiwan’s stock exchange slipped by 8.4 per cent.
What caused the meltdown?
The global share collapse began at the end of last week, after investors became alarmed at the prospect of a potential American recession.
Analysts said they feared the US Federal Reserve had made a mistake by not cutting interest rates last week.
Weak US employment and manufacturing figures last week sparked the sell-off as traders feared the world’s biggest economy may be poised to go into recession.
Policymakers left the Fed’s benchmark overnight interest rate unchanged in the 5.25 per cent – 5.50 per cent range last week, but opened the door to a rate cut at their September meeting. Traders are betting a cut is almost certain to happen at that meeting.
Higher rates can weigh on the economy because they make borrowing more expensive, which can lower the amount of disposable income people have, resulting in limits to what they can spend.
“A lot of it comes from faith that the Federal Reserve has gone a bit too far with its monetary policy in terms of keeping rates restrictive for too long. That negative sentiment has spilled over into other markets,” said Daniela Hathorn, analyst at Capital.com.
Wall Street’s so-called “Fear Index” – the Vix index that measures US stock market volatility surged to its highest level since November 2020.
What does it mean for pensions and investments?
A drop in stock markets will affect people with pension investments and other types of investments.
You may see the value of your pension or other investments go down in the short-term. But drops in performance do happen from time to time and, over longer periods, tend to iron themselves out.
It is too early at the moment to determine how serious Monday’s figures are for investors.
What does it mean for the UK?
A US recession is likely to impact efforts to fuel growth in Britain.
Costas Milas, economist at Liverpool University, said research suggested weak US growth would hit the UK’s economy, making it a less attractive place to invest.
“This should be a worry both for Rachel Reeves and [Bank of England Governor] Andrew Bailey: inbound FDI [foreign direct investment] to the UK has been consistently dropping after Brexit, which explains partly our poor productivity performance (since higher FDI flows raise domestic productivity) and therefore undermines the chancellor’s plans to fix our public finances.
“For the Bank, these are also worrying times: I fear the Bank of England Monetary Policy Committee will have to consider cutting interest rates as soon as November, if not earlier,” he added.
How does this compare to stock market crashes in the past?
Monday’s movement is what is often referred to as a ‘correction’, rather than a crash.
A correction occurs when it falls more than 10 per cent from a recent high, and this is what has happened in some stock markets – the tech-focused Nasdaq in the US and Japan’s Nikkei. In contrast to this, a crash is usually used to refer to a drop of 20 per cent or more.
The most notorious stock market collapse was the Wall Street crash of 1929, during which share values fell 25 per cent in just two days of trading. The collapse marked the start of very difficult period of trading. By July 1932, the Dow Jones Industrial Average had shed almost 90 per cent of its value. The market would not return to its former levels for another 22 years.
A quarter of the value of UK and US shares was wiped off in 1987, which was caused in part by the great storm three days earlier, when the stock exchange was forced to close early. Electronic trading also played a part and would later see the introduction of so-called circuit breakers to limit amounts and the amount of time to trade. Similar trading breakers occurred in Asia on Monday.
The Nasdaq crash – better known as the Dot.com bubble burst – in 2000 wiped out almost 75 per cent of the value of the market in a short period, but that crash was largely confined to tech stocks.
These instances above are more dramatic than what happened on Monday.
How long will it be until we know the full impact?
At the moment, stock performance is dropping, but this fall has been fairly short-lived so far.
The seriousness of the plunge will become clearer over the coming days. There are currently calls for the American central bank – the Fed – to cut interest rates in an emergency meeting.
These calls may intensify if the falls are sustained throughout the week.