The sell-off is a follow on from trading in US markets yesterday which saw the biggest fall for three years as the Dow Jones closed down 173 points, or 1.06%. The S&P 500 fared little better closing down 15 points, or 0.8%.
The FTSE has not been helped by pharma company Shire which has dropped another 10% after a big fall yesterday as the collapse of AbbVie’s planned takeover was confirmed.
According to Fidelity Worldwide Investment’s CIO Dominic Rossi, events of the past couple of days are more an opportunity than a crisis. “I think what we have seen is a mid-cycle correction that will actually prolong the current cycle rather than cut it short,” he said.
“We are seeing this downward movement because financial conditions are tightening, particularly in dollar terms but conditions in the US are actually pretty good, Rossi continued. “Private sector GDP growth is around 3% and with lower inflation we are seeing signs of real incomes growing. I think the sustainability of the US economy is clear and that will inevitably sustain asset valuations over the next year or so, particularly US equities. Markets will stabilise under leadership from the US and sectors such as tech and biotech,” he added.
While Rossi is confident on America’s prospects he does expect other parts of the world to suffer as a result of Federal Reserve policy, in the short term at least. “The US will deal with the tightening conditions well but more vulnerable parts of the world like emerging markets will take a hit,” he said.
Miton multi-asset manager David Jane believes it is a little too soon to draw such conclusions. “We have seen a rise in equity volatility as measured by the VIX index recently, which may reflect increasing worry around markets, and of course there remains the continuous downward drift in long-dated bond yields,” he said.
“Whether these trends reflect worries about future economic performance and the sustainability of current monetary policies, or they simply demonstrate some repositioning in advance of the end of QE this month will soon be known,” Jane added. "Clearly, with or without QE, investors still have an ongoing need for income and we expect short rates to remain very low well into the future so, beyond short term wobbles, the current environment is expected to continue.”
