A weak reading on the UK economy early Monday, following a hotter-than-expected inflation figure for the US on Friday, was seeming to confirm market fears of 'stagflation', sending share prices tumbling and lifting the dollar against rivals.
The FTSE 100 index was down 123.88 points, or 1.7%, at 7,193.64 midday Monday. The mid-cap FTSE 250 index was down 403.43 points, or 2.1%, at 19,269.89. The AIM All-Share index was down 22.48 points, or 2.4%, at 928.44.
The Cboe UK 100 index was down 1.6% at 717.27. The Cboe 250 was down 2.5% at 16,964.12, and the Cboe Small Companies down 1.2% at 14,381.24.
In mainland Europe, the CAC 40 in Paris was down 2.1%, while the DAX 40 in Frankfurt was down 2.1% on Monday.
Friday's stronger-than-forecast US inflation print have sent markets into a tailspin, with sentiment still depressed at the start of the new week.
‘Markets were already expecting a 50-basis point rate hike at the Fed's policy meeting this week, but markets moved to price in a more aggressive tightening trajectory. Fed funds futures now point to greater than 50% odds of a 75-basis point move in July and close to 310 basis points of tightening for 2022 overall, up from around 240 basis points in April,’ explained UBS.
UBS said the potential for more a more hawkish Fed and softening economic data also added to worries over the growth outlook.
The Federal Reserve unveils its latest US interest rate decision on Wednesday.
In the UK, these fears were refreshed early Monday, after the report the economy unexpectedly contracted again in April, leaving the Bank of England in a tough spot when it meets later this week.
Data from the Office for National Statistics showed gross domestic product contracted by 0.3% in April on a month before, badly missing FXStreet-cited market consensus of 0.2% growth. The reading also marked a deterioration from March's 0.1% fall.
The ONS added that this is the first time that all main sectors have contributed negatively to a monthly GDP estimate since January 2021.
The data comes ahead of Thursday's Bank of England policy announcement, with markets expecting the central bank to raise interest rates again. Some traders had braced for a half-point rate hike from the BoE this week - the same as the US Fed's recent pace - but expectations were scaled back to a 25 basis point hike following Monday's data.
Sterling was quoted at $1.2211 on Monday, slumping from $1.2321 at the London equities close on Friday and trading around its lowest price in a month.
The euro traded at $1.0471, down from $1.0518 late Friday. Against the yen, the dollar was quoted at JP¥134.45, up versus JP¥134.13, having earlier Monday topped JP¥135.
Ahead of the US open, Wall Street was on track for a sharply lower open. The Dow Jones was pointed down 1.9%, while the broad-based S&P 500 and the tech-heavy Nasdaq Composite both were seen down 2.9%.
In London, precious metals miner Fresnillo remained the top gainer in the FTSE 100, up 5.4%.
‘The mood out there is pretty grim, with the relief rally seen in late May starting to feel like a distant memory. You know things are bad when the best performer among the UK's top stocks is precious metal producer Fresnillo as investors reach for traditional safe havens,’ said AJ Bell investment director Russ Mould.
Gold was quoted at $1,854.27 an ounce early Monday, down against $1,862.37 on Friday. However, earlier on Monday, the price hit a high of $1,878.75.
Brent oil was trading at $119.99 a barrel, softening from $120.90 late Friday. Oil major BP was down 2.5% and peer Shell down 2.7%.
The natural resources sector took a hit after Beijing started a new round of mass testing in its most populous downtown district on Monday, after a rapidly spreading outbreak linked to a bar saw Covid rules tightened again in the capital.
A night of partying by one Beijing resident last week threw the city's tentative reopening into chaos, leading authorities to shutter nightlife venues in the downtown district of Chaoyang days after they reopened last Monday.
Miners were gathered towards the bottom of the FTSE 100 index. Glencore fell 5.4%, Antofagasta was down 5.0% and Anglo American down 4.2%.
In the FTSE 250 index, Ferrexpo fell 10% after saying it has reduced its output of iron ore pellets, amid difficulties in getting production out of war-torn Ukraine, but the miner said it is in talks with additional port operators in central Europe for seaborne exports.
The Baar, Switzerland-headquartered firm mines for iron in central Ukraine. It produced 4.4 million tonnes of iron ore pellets so far in 2022 as of the end of May, down 8% from the same point in 2021.
Ferrexpo said it will lower production for a period of time as the war in Ukraine blocks its export routes.
National Express sat atop the mid-caps, up 4.7%, in a positive read-across from peer Go-Ahead.
Go-Ahead rose 15% to £13.90 at midday, giving the firm a valuation of around £600 million, after receiving two takeover proposals at terms it ‘would be minded to recommend’ should a firm offer materialise.
The Newcastle, England-based public transport operator said it has received a takeover proposal from Sydney-listed transport Kelsian and another from a consortium consisting of Kinetic and Globalvia Inversiones.
Kinetic is a bus operator in Australia and New Zealand, while Globalvia is a Madrid-based transport infrastructure firm.
Kelsian operates transport services in the UK, Singapore and Australia. In May, Kelsian sold its Lea Interchange depot in east London to Stagecoach Group for £20 million.
Both approaches were unsolicited, Go-Ahead said.
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