Traders were spooked after both the International Monetary Fund (IMF) and ratings agency Moody’s made surprise interventions following chancellor Kwasi Kwarteng’s biggest tax package in 50 years on Friday.
The IMF openly urged prime minister Liz Truss to reverse the decision to scrap the top rate of income tax, adding that it was “closely monitoring recent economic developments in the UK and are engaged with the authorities".
It warned that the fiscal stimulus risked undermining the Bank of England’s efforts to curb inflation.
Meanwhile Moody’s raised the possibility of a credit rating downgrade for the UK as the recent economic policies risked "permanently weakening the UK's debt affordability".
Energy and mining stocks were the biggest drag on London’s benchmark index, while shares in both defensive and growth stocks were also out of fashion. A strengthening dollar weighed on metal prices while Hurricane Ian sparked further oil supply cuts.
It comes after sterling hit a record low of around $1.03 on Monday.
“Risk-off sentiment is gripping equity markets with European bourses opening in the red and the FTSE 100 down heavily. There are only two or three stocks trading in the green on the UK index while almost all stocks are under pressure,” Victoria Scholar, head of investment at Interactive Investor, said.
The US dollar index reached a fresh 20-year high on the back of rising US treasury yields.
Oil prices (BZ=F) also retreated to below $85 per barrel amid worries that the risks of a global recession have escalated. There is also speculation that the oil cartel OPEC+ could slash production to try and stop the slide in prices.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said: “Oil producers had been sitting pretty on pipelines of cash higher prices had generated and want to preserve those lucrative flows.”
Asia resumed its downward trend overnight, with the Nikkei (^N225) falling 1.5% on the day in Tokyo.
It came as China’s internationally traded yuan fell to the lowest level on record against the US dollar, on the back of a strengthening US greenback.