The FTSE 100 had its worst day for three years on Wednesday after poor economic data and a World Trade Organisation ruling spooked investors worldwide.
The World Trade Organisation (WTO) confirmed yesterday (October 2) that under its rules the US government can levy billions of dollars of tariffs on EU goods.
The fear that the EU could become embroiled in a trade war with the US similar to that which is currently impacting the Chinese market led to global equity markets, including the FTSE 100, tumbling.
The FTSE 100 fell 3.2 per cent over the course of the day, a drop worse than that seen in the immediate aftermath of the Brexit vote in June 2016.
This morning (3 October) the FTSE has fallen a further 0.3 per cent, and by lunchtime it was down 0.5 per cent.
UK construction data released yesterday was also worse than expected and confirmed the sector is in recession, while service data out this morning (October 3) indicated this sector is already in recession.
Whether the economy as a whole is in recession will be determined by the data for the third quarter of 2019, which will follow the negative growth seen in the second quarter.
Joshua Mahony, a senior market analyst at IG, said: "Market fears over a renewed US-EU trade war have been ramped up after the WTO confirmed rumours that they have given the green light to US tariffs on EU goods in response to Airbus subsidies.
"With markets having made tentative gains ahead of the US-China trade talks, we are seeing European stocks hit hard in anticipation of a widening rift between the US and EU, leading to a similar tit-for-tat trade war.
"Trump knows what hurts the EU most, and his willingness to act against auto makers could leave that sector exposed to future actions.”
Melanie Baker, senior economist at Royal London Asset Management, said: “Today’s [PMI] figures point to an increasingly challenging period for UK businesses.
"With more evidence today that uncertainty is damaging growth, a modest rate cut from the Bank of England in coming months is looking more likely.
"Survey responses continue to underline that Brexit-related worries are weighing on sentiment and activity.
"Alongside any concerns around global trade and growth prospects, such worries seem more likely to linger than disappear in the near-term."
But James Klempster, investment director at multi-asset fund house Momentum, said: "There is a lot of negative sentiment and a lot of weak data.
"But I think with unemployment so low and wages rising, the consumer hasn’t really felt it, and as long as that’s the case, you don’t get a really deep recession.”
david.thorpe@ft.com
