Dow Jones Industrial Average tanked over 655 points.
The FTSE 100 index closed at a five month low on Wednesday as traders balked at buying stocks globally as US government bond yields plunged, prompting recession fears.
The UK blue chip index ended 103.02 points lower at 7,147.88.
In the US, the 10-year Treasury note reportedly slipped 5.7 basis points to 1.623%, around its lowest levels since October 2016, while the two year note fell 4.7 basis points to 1.622% and the spread between the two temporarily fell to a negative 1 basis point.
Commentators noted that an inversion like this often comes before an economic downturn.
The inversion has sent shockwaves through the markets, and traders are running scared, said David Madden, analyst at CMC Markets.
“The major indices sold-off sharply for fear the US is heading for a recession. The underlying fundamentals are solid as the jobless rate is at multi-decade lows, and average earnings are outstripping inflation, but for now dealers are focusing on the yield curve, and equities are taking a hammering,” he added.
On Wall Street, the Dow Jones Industrial Average tanked over 655 points to 25,636, while the tech heavy Nasdaq exchange plunged over 229 points at 7,786.
The FTSE 100 is currently at a five-month low as recession fears sent traders firmly into risk-off mode.
Into its last hour of trading, the index was down around 100 points at 7,150, having sunk deeper and deeper into the red from an initial morning tumble.
It was even worse for the mid-cap FTSE 250, which had plunged 236 points to 18,772.
There was better news for the pound, which thanks to higher-than-expected inflation for July had remained mostly steady against the dollar at US$1.2060 while jumping 0.23% to €1.0818 against the euro.
The day’s star blue-chip performer was insurer Admiral, which by late-afternoon had retained its top spot with shares up 4.5% at 2,123p, while travel group TUI AG (LON:TUI) was the heaviest faller slumping 4.4% to 774.6p.
Wall Street opened to a bloodbath on Wednesday as recession worries sent equities tumbling across the board.
A few minutes after the open the Dow had tumbled 1.46% with the S&P 500 following close behind with a 1.4% drop while the Nasdaq slumped 1.61%.
The slide seems to be due mainly to a yield inversion between two-year and 10-year US treasury bonds, an event often interpreted as a reliable indicator of impending recession.
The gloomy atmosphere was replicated in London as the FTSE 100 sank 101 points to 7,149.
Traders are looking decidedly uneasy ahead of the US open on Wednesday morning as bleak global data and the inversion of the yield curve on US treasuries have recession alarms blaring across the market.
The expected losses are threatening to erase gains from Tuesday when markets climbed on the back of news that Trump would delay new tariffs on certain Chinese goods until December, raising hopes that the two countries could reach a trade deal at talks scheduled for September.
Another headache for the markets is coming from the heart of Europe as German economic data showed the country’s economy shrank by 0.1% in the second quarter of the year as the ongoing US-China trade war and Brexit uncertainty took their toll on exports.
“The move by the Trump administration [to delay tariffs] appears to be too little, too late as far as the markets are concerned,” said Fiona Cincotta, senior market analyst at City Index.
“Data is showing that damage to the global economy owing to the ongoing trade dispute has already been done”, she added.
Will most of the signs pointing downwards, investors will be hoping for some relief from tomorrow’s US retail sales data, which could provide clues as to the health of the world’s largest economy, with any weakness likely to pull markets down further.
In London, the FTSE 100 has continued its slump and was down 100 points at around 7,151 in early afternoon trading.
As the morning drew to a close the FTSE 100 continued to slip deeper into the red, eschewing the positivity that had helped global markets move upwards overnight.
In the final hour of morning trading, the blue-chip index had slumped 40 points to 7,210.
The market hasn’t been helped by some renewed strength in the pound, which following the latest batch of UK inflation data was 0.17% higher at US$1.2079 against the dollar and up 0.11% at €1.0805 against the euro.
Insurance group Admiral had retained its place at the top of the FTSE 100 risers, up 3.8% at 2,109p following a resilient set of first half results, while at the other end turnaround specialist Melrose Industries PLC (LON:MRO) had slumped 3.6% to 166.7p.
Meanwhile, an inversion in yield curves for US two-year and 10-year treasury bonds for the first time since 2007 has sent some alarm bells ringing that a recession could be on the cards.
A yield inversion is when interest rates on long-term bonds become lower than short-term ones, which historically has preceded a recession in the issuing country’s economy.
For example, the last three times US bond yields inverted a recession followed soon after.
Neil Wilson, chief market analyst at Markets.com, said the inversion was a “massive red warning light” for the US economy, adding that the change was a sell signal for risk assets and should put “extra pressure” on the equities markets.
To make traders a little more nervous, the yield curve for UK two-year and 10-year gilts has also inverted for the first time since 2008.
This was however good news for gold traders, with the price of the yellow metal rising 0.4% to US$1,508.5 an ounce shortly after the news broke.