A bonfire of taxes by the new UK government did little to improve market sentiment on Friday, as investors contemplated worsening economic data and rising interest rates.
The pound suffered the most, threatening to join the euro in falling to parity with the dollar.
The FTSE 100 index was down 134.82 points, or 1.9%, at 7,024.70 midday Friday. It sits roughly 25 points above the 7,000 mark, a floor below which the blue-chip index has not closed since March.
The mid-cap FTSE 250 index was down 307.53 points, or 1.7%, at 18,024.16. The AIM All-Share index was down 9.02 points, or 1.1%, at 838.40.
The Cboe UK 100 index was down 1.7% at 702.19. The Cboe 250 was down 1.8% at 15,419.48, and the Cboe Small Companies was down 0.2% at 13,244.19.
The CAC 40 stock index in Paris was down 1.7% midday Friday, while the DAX 40 in Frankfurt was down 1.9%.
Stocks in New York were called to open lower. The Dow Jones Industrial Average was called down 1.0%, the S&P 500 down 1.1% and the Nasdaq Composite down 1.3%.
‘It's been a major week for the markets with increases in UK and US interest rates and now a mini-budget from the new UK government,’ AJ Bell analyst Russ Mould commented.
‘On one hand you have the central banks acting as the evil bad guys pushing up the cost of borrowing, and on the other you have the UK government as the superhero trying to find solutions to ease the pain for consumers and businesses. As always, the big question is how these solutions will be funded.’
The UK chancellor on Friday announced a ‘permanent’ cut to stamp duty and a reversal of tax hikes as part of plans to usher in a growth-focused ‘new era’ for the country.
During Friday's 'fiscal event', Kwasi Kwarteng abolished the top rate of income tax for the highest earners, as he spent tens of billions of pounds to drive up growth during a cost-of-living crisis.
From April, the 629,000 earners getting more than £150,000 a year will no longer pay the top income tax rate of 45% and will instead pay the 40% applicable to those on over £50,271. And he brought forward the planned cut to the basic rate of income tax to 19p in the pound a year early to April.
He confirmed that a 1.25 percentage point national insurance hike, announced by the previous Conservative government, has been cancelled. A hike in corporation tax, which would have taken the levy to 25% next year, has also been reversed. It will remain at 19%.
A cap on bankers' bonuses also will be scrapped, Kwarteng confirmed.
Turning to energy bills, Kwarteng said a typical household bill be capped at £2,500 over the next two years. Firms will get energy bill help as part of measures funded through government borrowing, rather than through a so-called ‘windfall tax’ on oil companies.
The pound often thrives in situations where monetary policy tightening is coupled with fiscal stimulus. This was not the case on Friday, with sterling even falling below the $1.11 mark.
The pound, trading at its lowest value since 1985, is edging closer to following the euro to dollar-parity.
The pound was quoted at $1.1061 midday Friday in London, down sharply from $1.1257 at the London equities close on Thursday.
A weak UK PMI reading did little to benefit sterling.
The UK private sector fell further into decline in September, preliminary figures showed.
The latest S&P Global/CIPS flash composite purchasing managers' index fell to 48.4 points in September from August's final figure of 49.6. The PMI fell further below the 50.0 neutral mark, suggesting the decline deepened in September.
The euro stood at $0.9763 midday London time on Friday, down from $0.9827 on Thursday.
Like the UK, the eurozone's private sector fell deeper into negative territory. The flash composite PMI there faded to 48.2 points in September from August's final score of 48.9.
Against the yen, the dollar was trading at JP¥143.00, up from JP¥142.17.
Brent oil traded at $88.00 a barrel midday Friday, down from $90.24 at the London equities close on Thursday.
On the London Stock Exchange, oil companies were among the worst blue-chip performers, tracking Brent prices lower.
Shell and BP, key to the FTSE's outperformance compared to European peers this year, were its undoing on Friday.
BP fell 3.3% and Shell gave back 3.4%. Fellow energy blue-chip Harbour Energy lost 5.6%.
Smiths Group rose 2.5%, topping the large-cap benchmark.
The engineering firm said revenue in the financial year that ended July 31 rose 6.8% to £2.57 billion from £2.41 billion. Organic revenue rose 3.8%, Smiths added, the best top-line showing in nearly a decade.
TheWorks.co.uk swung to an annual profit and said it has started the new financial year in good shape. Shares in the Birmingham-based toys, crafts and stationary retailer surged 42%.
In the financial year that ended May 1, revenue climbed 47% to £264.6 million from £180.7 million the year before. It swung to a pretax profit of £10.2 million from a loss of £2.8 million in the same period the year before.
Made.com tumbled 23%. The sofa seller has put itself up for sale and announced plans for strategic review. Its fortunes have weakened due to cost-of-living pressures.
It is also eyeing cutting costs as its cash begins to run out. The Financial Times on Thursday reported Made plans to cut a third of its workforce.
The wider strategic review will mull its balance sheet options, which include debt financing, strategic investment or even a sale of the company. It ruled out an equity raise though, saying current conditions are not conducive to raising ‘sufficient equity from public market investors’.
Gold was quoted at $1,653.65 an ounce midday Friday, down from $1,669.31 at the London equities close on Thursday.
Still to come on Friday's economic calendar is a US PMI reading at 1445 BST.
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