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FTSE 100 loses £50bn as Federal Reserve taper fears are realised

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People walking to work with London's financial district in the background
People walking to work with London's financial district in the background. Photo: Getty

European markets dropped on Thursday in London, pulling back after anxiety shook Wall Street about the potential tapering of bond purchases and fresh warnings about the Delta variant. 

The FTSE (^FTSE) was down 1.5% by the closing bell – having earlier registered a combined loss of £50bn in value, according to Hargreaves Lansdown. Germany's DAX (^GDAXI) was down 1.2% and the CAC (^FCHI) was almost 2.3% lower. 

Over the last week, economic data from the US, Europe and China has all suggested that the rate at which major economies have been recovering in recent months is slowing.

Alongside this, research was released on Wednesday that suggested that people who become infected with the Delta variant of COVID even after being fully vaccinated may still pass the virus on.

The research showed levels of the virus could be just as high in people who get COVID despite having both jabs as in those who haven't been vaccinated. The study strengthens the case for booster jabs. The US has already announced it will start administering them. 

“With sentiment getting knocked it is perhaps no surprise to see defensive sectors faring best in a sea of red in the markets today. Shares in utilities and healthcare companies are holding up relatively well, but commodity and energy producers are amongst the worst hit," said Steve Clayton, HL Select fund manager.

"If vaccinations can keep the virus from doing its worst, then confidence should improve before too long. Businesses drove a lot of costs out during the pandemic, which bodes well for future profit margins.”

US stocks followed Asia and Europe lower initially before painting a mixed picture. The S&P 500 (^GSPC) was down 0.4% at the open before trading flat as markets closed in London. The Dow (^DJI) was down 0.4% and the Nasdaq (^IXIC) was up 0.2%.  

The moves came even as new data showed that initial unemployment claims in the US fell further last week to the lowest level since March 2020, bringing the level of weekly new filings closer to pre-virus levels.

The slide came after the release of Federal Reserve meeting notes that showed officials agreed on slowing the pace of bond purchases later this year. Markets have been on edge about the prospect of tapering for weeks now. 

US stocks had finished Wednesday's session around 1% down across the board.

"The Fed's ultra-easy monetary policy, which has been in effect since 2020, has provided support to financial markets by driving down bond yields," said Naeem Aslam, chief market analyst at AvaTrade.

"Because of lower returns on these bonds, investors have shifted to riskier assets such as equities, which typically provide higher returns. The shift toward a tighter monetary policy, on the other hand, indicates that the central bank is unlikely to provide the same level of liquidity to investors in the near future."

Read more: John Lewis launches ISAs as it looks to expand beyond retail

In Asia, stocks retreated overnight. The Hang Seng (^HSI) was down 2.1% at the close, the SSE Composite (000001.SS) fell 0.6% and the Nikkei (^N225) declined 1.1%. 

Turmoil in Afghanistan and regulatory crackdowns in China have all weighed on sentiment. 

Oil is down to its lowest levels since May.

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