Global stock markets drop as inflation fears prompt sell-off

Global stock markets ended February deep in the red, as fears of higher inflation prompted a sell-off in government bonds and spread anxiety across financial markets.

The UK’s FTSE 100 index fell 168 points to 6,483, a 2.5% drop – the biggest one-day fall in percentage terms since the end of October.

The UK stock market suffered the heaviest losses in Europe, while Germany’s Dax fell 0.67%, France’s CAC slid 1.4%, Italy’s FTSE MiB shed 0.9% and Spain’s Ibex lost 1.1%. The Europe Stoxx 600 index tracking the biggest European companies fell 1.7% and is down 2.5% over the week as a whole.

Energy companies, mining stocks and property firms were the worst-performing sectors in London. They would be hit hard if central bankers started moving away from ultra-low interest rates and tightened policy to fight inflation.

Michael Hewson, chief market analyst at the trading platform CMC Markets UK, also noted that weaker oil and copper prices prompted some end-of-week profit-taking on the likes of BP, Royal Dutch Shell, Anglo American and Antofagasta.

On Wall Street, the Dow Jones shed a further 225 points on Friday afternoon, or 0.7%, leaving the index hovering close to 31,200. The Nasdaq rose about 160 points, or 1.25%, after suffering the heaviest sell-off since October on Thursday when it fell 3.5%.

Government bond prices dropped again, pushing up yields further. Five- and 10-year gilt yields rose to their highest level since March, after the Bank of England’s chief economist, Andy Haldane, warned that an inflationary “tiger” might be on the loose, which means that borrowing costs could be raised sooner than markets expect. In a speech entitled Inflation: A Tiger by the Tail?, he warned central bankers against becoming complacent about the risks posed by rising inflation.

US Treasury yields have also surged on expectations of stronger economic growth and higher inflation in the wake of the $1.9tn fiscal stimulus package proposed by the president, Joe Biden.

Sterling has also been hit by the rush away from riskier assets. The pound fell 0.5% to $1.394 against the dollar, away from the near-three-year high of over $1.42 of earlier this week. Gold prices fell to an eight-month low, down 3%.

Weak economic figures also fuelled the stock sell-off. US consumer sentiment hit a six-month low, according to the University of Michigan’s monthly healthcheck.

Chris Beauchamp, chief market analyst at the trading platform IG, said: “This is the most serious move to the downside in months; not since the see-saw movement of September and October have we seen such a serious drop [in stocks]. It is clear that very few investors are willing to step up and buy the dip, at least for the time being.”