FTSE 100 hits six-week low as recession fears spook investors

A trader poses in front of a screen on a trading floor in London January 22, 2010. The FTSE 100 was set on course for its biggest weekly fall in three months at midday on Friday, as U.S. president's plans to limit banking activities hit bank shares, while commodities fell on demand fears.   REUTERS/Stefan Wermuth (BRITAIN - Tags: BUSINESS)
In London, the FTSE 100 fell 1.1% after opening, hitting a six-week low as government bond markets weakened. Photo: Stefan Wermuth/Reuters (Stefan Wermuth / Reuters)

European stock markets continued their decline on Thursday after heavy losses the previous session, as recession fears continue to rattle investors.

In London, the FTSE 100 (^FTSE) fell 1.8% by the end of the day, hitting a six-week low as government bond markets weakened. The CAC (^FCHI) also tumbled 1.5% in Paris, and the Frankfurt DAX (^GDAXI) was 1.7% lower.

It came as Fitch Ratings said a recession in the eurozone "now appears likely" as a result of the deepening gas crisis.

The ratings agency said economic vulnerabilities to a shut-off of Russian pipeline gas supplies are still very high despite recent efforts to diversify import sources, particularly into liquefied natural gas.

"A shut-off would have a significant supply-side impact on GDP due to the limited ability in the near term to substitute lost gas supplies with other inputs.

"Rationing would amplify economic disruptions. While widespread rationing across the EU is not inevitable even in a shut-off scenario, it would be a high risk in some countries, including Germany."

Meanwhile, the Resolution Foundation revealed that the number of people living in absolute poverty is set to rise by 3 million, to 14 million people in 2023-24, with real household disposable incomes on course to fall by 10% over this year and in 2023.

As many as one in three children could also fall into relative poverty, the highest level since the peaks of the 1990s.

On the back of the news, the pound tumbled to its lowest level against the US dollar (GBPUSD=X) since the pandemic crash in March 2020.

Sterling dropped as low as $1.1565 on Thursday morning, as the energy crisis continued to hammer businesses and consumers. The currency saw its worst month against the dollar last month since October 2016.

Read more: Pound sees biggest monthly fall against dollar since 2016

Across the pond on Wall Street, the S&P 500 (^GSPC) dipped 0.9% and the tech-heavy Nasdaq (^IXIC) fell 1.9% by the time of the European close. The Dow Jones (^DJI) edged 0.3% lower.

It came as applications for US unemployment insurance fell for a third week to a two-month low, pointing to healthy demand for labour even as economic growth slows.

Initial unemployment claims decreased by 5,000 to 232,000 in the week ending 27 August, according to Labour Department data.

Continuing claims for state benefits rose to 1.44 million in the week ending 20 August from 1.41 million.

“While US markets fell sharply in August, we’ve also seen sharp declines in global bond markets, with US yields jumping sharply higher,” Michael Hewson of CMC Markets said.

“While US yields have seen a sharp rise, these gains have been outpaced by a surge in German and UK yields both on the short and the long end, as markets increasingly price in the prospect of much higher interest rates, as central banks signal a singular determination to rein in sharply rising inflation.”

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The US dollar also had a strong month in August, finishing higher for the third month in a row and closing at a 20-year high.

Stocks in Asia ended the day lower, with the Nikkei (^N225) falling 1.5% in Tokyo while the Hang Seng (^HSI) slumped 1.7% and the Shanghai Composite (000001.SS) dipped 0.5%.

It came as Japan’s manufacturers suffered a sharp loss of new orders in August, according to the latest PMI data, decreasing at the quickest pace since October 2020.

Production levels were also down for the second month running. China’s factories also suffered, with power cuts adding to their woes.

Watch: How does inflation affect interest rates?