The FTSE 100 took a hit of 2.1% to 7,317.5 at close of trading on Friday, after US inflation was revealed to have surged to a 40-year high of 8.6% in May this year.
Global equity markets sank, with the NASDAQ down 3.1% to 11,390.1, the Dow sliding 2% to 15,155.4, the German DAX falling 2.7% to 13,814.6, the French CAC dropping 2.6% to 6192.2 and the Italian FTSE MIB decreasing 4.4% to 22,708.6.
The route in European shares came a day after the ECB ended assets purchases and said they would start increasing interest rates for the first time in over a decade.
Today’s US inflation data means markets will likely have to swallow additional moves to tighten monetary policy, with the US Federal Reserve predicted to scale up interest rates by 0.5% next week.
“The data dashed hopes that inflation had passed its peak and means a 0.5% rate hike by the Fed next week is all but guaranteed. It also means Fed guidance regarding further rate hikes is all the more likely to be hawkish,” said Kingswood investment strategist Rupert Thompson.
Commodities producers tumbled as Shanghai re-entered Covid-19 lockdown, which sparked fears that the major global production hub was set to grind to a halt.
Anglo American shares plummeted 7.3% to 3,611p, Antofagasta decrease 3.5% to 1,431p, Glencore fell 4.8% to 507.3p, Rio Tinto was down 3.6% to 5,686 and Croda dipped 1.9% to 6,348p.
“The FTSE 100 fell … as commodity producers took a tumble thanks to Shanghai going back into lockdown, which might cause China to buy fewer commodities if the Covid flare-up lasts a long time,” said AJ Bell investment director Russ Mould.
Meanwhile, banks have been warned today by the Bank of England to pull their act together, after the institution issued a statement that the companies were no longer “too big to fail.”
There was notable room for improvement, as the Bank shook its finger at Lloyds, Standard Chartered and HSBC, all of which were told to improve their resolution plans. The banks all apparently agreed to the mandate.
“With a gloomy near-term economic outlook, the resolvability test will provide some relief that the UK’s key financial players wouldn’t cause a disaster if something went very badly wrong,” said Mould.
“It’s important to recognise this test wasn’t carried about because of ‘live’ fears. It is more a case of good practice and guarding against a repeat of the global financial crisis in which some banks got into trouble and had to be bailed out using taxpayers’ money.”
“This isn’t to say the UK banks all have a clean bill of health. There are still places where they could do better, so it’s back to the gym for many of them, including HSBC which has identified areas for further improvement.”