A toxic combination of rising interest rates and weakening economic activity ensured that September started poorly for equities.
A new Covid-19 lockdown in China added to concerns raised by negative set of manufacturing PMI readings.
The FTSE 100 index was down 109.06 points, or 1.5%, at 7,175.09 on Thursday. The mid-cap FTSE 250 index was down 346.79 points, or 1.8%, at 18,716.96. The AIM All-Share index was down 13.29 points, or 1.5%, at 869.44.
The Cboe UK 100 index was down 1.5% at 716.91. The Cboe 250 was down 2.2% at 16,027.77, and the Cboe Small Companies down 0.4% at 13,873.62.
In mainland Europe, the CAC 40 in Paris was down 1.3% while the DAX 40 in Frankfurt was down 1.2% on Thursday.
‘The 'risk-off' sentiment keeps strengthening this week after the summer optimism faded following the latest hawkish speeches at the Jackson Hole symposium last week,’ said Pierre Veyret, technical analyst at ActivTrades.
‘Jerome Powell's determination to tackle inflation at all costs while more and more macro data point towards an economic downturn is a massive bearish market driver to investors,’ Veyret continued.
‘Furthermore, the recent lockdown pronounced by Beijing in Chengdu - a city of 21 million people - is also adding pressure to riskier assets, as it sparks expectation of slower demand for several assets in the world's second-largest economy.’
Around 16 million people in the Chinese city of Chengdu will be effectively under lockdown from Thursday as authorities race to snuff out a new Covid-19 outbreak.
China has stuck fast to its zero-tolerance virus strategy despite disruptions caused by the fast-spreading Omicron strain and concern that the approach is stifling its post-pandemic economic recovery.
These worries were heightened by survey data on Thursday that revealed China's factory sector unexpectedly slipped into contraction in August.
The Caixin manufacturing purchasing managers' index slipped past the no-change mark of 50.0, as the reading fell to 49.5 points in August from 50.4 in July, indicating a marginal decline. Consensus, as cited by FXStreet, had been expecting a reading of 50.2.
‘Manufacturing supply expanded while demand shrank. Although output increased for the third successive month, the rate of expansion was marginal due chiefly to power cuts caused by the heat wave. The subindex for total new orders fell into contraction, with overall market demand dampened by high temperatures and the resurgence of Covid-19 infections in some parts of the country,’ said Wang Zhe, senior economist at Caixin Insight Group.
PMIs readings out of the eurozone and UK showed manufacturers there also are struggling.
The S&P Global/Chartered Institute of Procurement & Supply UK manufacturing PMI fell to 47.3 points in August from 52.1 in July.
‘This is the first sub-50.0 PMI reading since May 2020,’ said S&P Global. However, the reading beat the even-worse flash estimate of 46.0 points.
The pound fell to $1.1564 following the economic data from $1.1638 at the London equities close on Wednesday. The euro traded at $1.0015, down from $1.0064 late Wednesday.
The eurozone manufacturing PMI came in at 49.6 points, down from July's 49.8 and below the flash reading of 49.7.
With the market pricing in a 75 basis point rate hike from the US Federal Reserve later this month, following the recent hawkish comments from Chair Jerome Powell, all eyes now lie on this afternoon's US PMIs.
There is a US S&P Global manufacturing PMI at 1445 BST, followed by the ISM index at 1500 BST.
Rabobank said markets will be ‘secretly hoping for a weak number’ in the ISM release. The figure is seen declining to 52.0 in August from 52.8 in July, according to FXStreet consensus.
Ahead of the data, Wall Street was pointed to a lower start. The Dow Jones was called down 0.6%, the S&P 500 down 0.7%, and the Nasdaq Composite down 1.1%.
Against the yen, the dollar was quoted at JP¥139.34 on Thursday, up from JP¥138.75.
Brent oil was trading at $93.44 a barrel, down from $97.05 late Wednesday. Gold was quoted at $1,700.86 an ounce, lower than $1,720.40 on Wednesday.
In London, Glencore was the worst performer in the FTSE 100, down 7.1%. The stock went ex-dividend on Thursday, meaning new buyers no longer qualify for the latest payout.
In addition, London's miners were suffering from the weak Chinese manufacturing PMI. Shares in Antofagasta - which also went ex-dividend - were down 3.5%, while Rio Tinto was down 3.5%, and Anglo American down 3.4%.
Rio Tinto said it has reached a new agreement to take full ownership of Turquoise Hill Resources at an improved price of C$43, around $32.64, per share. Turquoise Hill is the owner of the massive Oyu Tolgoi copper-gold project in Mongolia.
Reckitt Benckiser fell 4.2% after saying Chief Executive Officer Laxman Narasimhan is stepping down to relocate back to the US.
He will be replaced for now by Senior Independent Director Nicandro Durante while the company ‘evaluates and selects’ the future leadership. Durante has previous experience heading up a FTSE 100 listing, having been the boss of British American Tobacco for eight years before leaving in 2019.
In the green was Pearson, up 1.3% after JPMorgan reinitiated the education publisher with an 'overweight' rating.
There were more ex-dividend stocks at the bottom of the FTSE 250, including PageGroup, down 8.7%, Redde Northgate, down 7.0%, and LondonMetric, down 4.9%.
Elsewhere, Cineworld shares were up 7.2%, continuing their volatile ride after the cinema chain owner last week said it was considering filing for Chapter 11 bankruptcy in the US. The stock had jumped 44% on Wednesday but remains down 88% since the start of 2022.
On Wednesday evening, the stock was kicked out the FTSE All-Share index in the latest index review. The change will be effective from Monday, September 19.
Shares in AIM-listed Cake Box rebounded 12% after a profit warning on Wednesday had sent its shares down 40%.
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