The FTSE 100 slumped to its worst week since the depths of the financial crisis as fears of a new global recession wiped more than $2.5tn (£1.5tn) from the value of stock markets around the world.
After heavy selling at the open in London, the FTSE and Wall Street rallied briefly after the latest US employment report for July showed the economy created 117,000 jobs, beating the 85,000 forecast by economists.
The turmoil of the previous four days had only intensified investors’ focus on a jobs report that was always likely to be the most important economic release of the week. “In the context of a normal recovery, it’s not a strong number,” said Eric Stein, a fund manager at Eaton Vance in Boston. “But in the context of the fear that’s been permeating the market it’s not a terrible number.”
A barrage of weak data from the US consumer, as well as America’s services and manufacturing sector, had raised the strongest fears in two years that the world’s biggest economy could slide back into recession. President Barack Obama said in Washington that the jobs number was a promising sign but more was needed to “create a self-sustaining cycle”. In London, George Osborne, the Chancellor, and Mervyn King, the Governor of the Bank of England, spoke yesterday and will keep monitoring the state of financial markets.
But on another roller-coaster day on trading floors, the fear that has had the whip hand all week resurfaced by early afternoon as investors drilled into the jobs report. The unemployment rate fell back to 9.1pc from 9.2pc in June largely because 193,000 people gave up looking for work; the average working week was unchanged at 34.3 hours; and the number of long-term unemployed didn’t budge from 6.2m.
“One nice number isn’t enough to change sentiment at the moment,” said Ted Weisberg of Seaport Securities. “Folks are scared and want to take risk off the table.”
No market yesterday escaped the volatility that has proved a feature of the week. Having rallied close to record highs over the first four days, the jobs data was enough to send US government bond prices sharply lower yesterday. The yield on the two-year Treasury note climbed to 0.28pc from the 0.25pc plumbed on Thursday, while the yield on the 10-year bond – used to set the borrowing rate for many companies in the US – jumped eight basis points to 2.48pc.
On a day rich with rumour, traders said that the bond market was also under pressure from speculation that the ratings agency Standard & Poor’s could downgrade America’s AAA credit rating before the day finished.
In the oil markets the focus was on what a slowing global economy means for demand for crude. Brent crude prices ended the week 8pc lower at $107.40, their steepest weekly drop in three months. Gold, meanwhile, shrugged off the better-than-expected employment report to trade up 0.2pc at $1,662.20 in early afternoon trading in New York. Although prices dipped from the record $1.684.90 reached on Thursday, the yellow metal still rose for the fifth straight week as investors ran for cover. “There is a perfect storm for gold prices given the uncertainty about the debt crises in Europe and the US,” said Arne Lohmann Rasmussen, an analyst with Danske Bank.
Germany’s Dax, France’s CAC 40 and Japan’s Nikkei 225 all slumped yesterday. The increasingly fragile condition of the US economy has been heaped on top of investors’ existing fears over Europe’s debt crisis. And in a late twist yesterday on Wall Street, markets again reversed gear to rally on reports that the European Central Bank was prepared to buy the debt of Italy and Spain, the two countries that have been in the eye of the storm. Italian prime minister Silvio Berlusconi said a G7 meeting may be brought forward.
After a week of turmoil, the S&P managed to close up 1pc at 1,209.85, while the Dow finished 0.8pc higher at 11,507.60