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European financial markets have fallen sharply on fears that central banks will start tapering their emergency Covid-19 support packages, despite slowing growth in the world economy.
In London, the FTSE 100 fell by more than 160 points, or about 2.3%, on Thursday morning to trade at about 7,000 as share prices tumbled across the continent after the US Federal Reserve said it could start cutting back support for the economy this year.
Stock markets in Germany, France and Italy were down by more than 2%, while the Ibex in Spain was 1.7% lower.
Fed officials signalled late on Wednesday that the threshold for the US central bank reining in its quantitative easing bond-buying programme could be breached in the final three months of the year, sooner than investors’ had anticipated.
Indicating that preparations would soon be under way for tapering emergency support, despite the Delta variant of Covid-19 holding back the pace of the global economic recovery, officials suggested economic and financial conditions “would likely warrant a reduction in coming months”.
But while some members of the Fed’s rate-setting federal open market committee judged that it could be appropriate to start reducing the pace of asset purchases this year, it added: “Several others indicated, however, that a reduction in the pace of asset purchases was more likely to become appropriate early next year.”
Inflation has soared in several advanced economies this year amid supply bottlenecks as the recovery from Covid-19 gets under way. US inflation hit a 13-year high of 5.4%, well above the Fed’s 2% target rate. UK inflation fell from 2.5% to 2% in July, although is expected to climb to 4% this year.
Much of the rise in prices is expected to be temporary as Covid disruption recedes, while economists caution that the inflation figures reflect prices returning to more normal levels after a historic slump in the first lockdown.
However, signs that the world’s most prominent central bank could begin reducing its pandemic support measures sent Asian stocks tumbling overnight, with the sell-off extended on Thursday morning across Europe.
Meanwhile, a slump in global commodity prices led mining stocks to come under pressure, with natural resources companies among the biggest fallers on the FTSE 100 on Thursday.
Shares in mining companies, including Antofagasta and BHP, fell by more than 4% as a range of global commodity prices tumbled. The global oil price fell by more than 3%, copper dropped more than 2%, and other materials including steel, aluminium and zinc fell.
Other natural resources firms to fall included BP and Rio Tinto, amid concern over weaker demand as momentum in the economic recovery from lockdown faltered in several countries.
Russ Mould, an investment director at the Manchester-based stockbroker AJ Bell, said: “The Fed minutes, showing a split between members over when to start scaling back financial stimulus, the continuing spread globally for the Delta variant, weakness in the Chinese economy and the turmoil in Afghanistan add up to a cocktail of worries which are dogging investor sentiment.”
“The question now is whether a volatile week is the prelude to the kind of late summer sell-off we have seen in previous years, or if the market can regain its poise moving into the autumn.”