The week's calm start had deteriorated by midday on Tuesday, with European stock prices tumbling and the euro hitting twenty-year lows against the dollar as recession fears once again gripped markets following some weaker European data.
UBS said the turbulence of the first half of 2022 is likely to persist in the remaining six months of the year.
‘A more durable improvement in market sentiment is unlikely until markets see more compelling evidence that inflation can be brought back under control, allowing central banks to pause or stop hiking rates,’ said UBS.
The blue-chip FTSE 100 index was down 60.76 points, or 0.8%, at 7,171.89. The mid-cap FTSE 250 index was down 124.60 points, or 0.7%, at 18,468.35. The AIM All-Share index was down 4.49 points, or 0.5%, at 870.53.
The Cboe UK 100 index was down 1.0% at 715.01. The Cboe 250 was 1.0% lower at 16,029.90, while the Cboe Small Companies was 0.4% lower at 13,235.77.
In mainland Europe, the CAC 40 stock index in Paris was down 1.1%, while the DAX 40 in Frankfurt was 0.9% lower.
The dollar was stronger in midday trade, gaining markedly on the pound and euro and just about clinging on to earlier gains against the safe haven Japanese yen amid the risk-off mood.
The pound was quoted at $1.2039 midday Tuesday, down sharply from $1.2114 late Monday. Against the yen, the dollar was trading at JP¥135.83, up from JP¥135.72. It had fetched JP¥136.34 earlier on Tuesday, however.
The euro stood at $1.0300, down sharply from $1.0430. Earlier on Tuesday, the single currency fell below the $1.03 mark for the first time in 20 years.
Worrying private sector data from the eurozone dealt the latest blow to the euro - which has struggled so far this year, as central banking counterparts across the globe have tightened monetary policy at a faster pace than the European Central Bank, which is still yet to carry out its first post-pandemic rate hike.
The eurozone's private sector growth slowed in June, succumbing to weaker demand and falling confidence.
The S&P Global composite index fell to 52.0 points in June from 54.8 in May. The tally remained above the 50.0 no change threshold, though the figure suggests private sector growth has eased.
The pace of the expansion was ‘modest overall’, S&P Global said.
Also fuelling recession fears, the eurozone services purchasing managers' index reading alone fell to 53.0 in June from 56.1 in May.
The UK's services economy had a more resilient June than expected, however.
The all-important sector rounded off a difficult second quarter with better-than-expected growth. The latest S&P Global/CIPS UK services PMI expanded to 54.3 points in June, from 53.4 in May. It was the sixteenth successive month in which the index has been in growth territory.
The final June figure was above the 53.4 flash estimate. However, the PMI's average reading for the second quarter was 55.6 points, down from 59.1 in the first three months of 2022.
In London, growth fears hit miners. Anglo American lost 4.8%, while Glencore fell 3.9%.
The financial sector also struggled amid recession fears, despite receiving somewhat of a vote of confidence from the Bank of England.
Barclays fell 1.8%, NatWest gave back 1.3% and Lloyds lost 0.5%.
The Bank of England's Financial Policy Committee on Tuesday said the health of the UK economy has ‘deteriorated materially’, but lenders appear resilient.
Despite this volatility and increased downside pressure, the BoE feels UK lenders have ‘considerable capacity’ to support lending to households and businesses ‘even with the deterioration in the economic outlook.’
‘In line with expectations, capital ratios declined in 2022 Q1 and are expected to fall back slightly over coming quarters. Nevertheless, major UK banks' capital and liquidity positions remain strong, and profitability has strengthened in aggregate,’ the report noted.
However, the committee said the banks will need to set aside more cash to absorb shocks in the financial markets from next year, despite the Bank of England saying lenders are well-placed to support households and businesses.
Officials have ordered them to set aside 2% of their capital - or around £22 billion - as part of the countercyclical capital buffer from this time next year.
The buffer – introduced in the wake of the financial crisis to ensure banks have a rainy day fund – was slashed to zero during the pandemic, releasing billions of pounds to help businesses and households.
Back in London, share price declines were largely with broad-based, with retail, leisure and travel stocks hit by recession worries.
Picture house operator Cineworld lost 3.4%, sofa seller Made.com fell 2.6% and Currys declined 3.7%.
Asos bucked the trend, however, on the back of a bullish broker note. Exane BNP lifted the online retailer to 'neutral' from 'underperform'. However, it cut peer boohoo to 'neutral' from 'outperform'.
Asos shares were up 1.2%, while boohoo fell 2.8%.
Stocks in New York are set to for a subdued open after the Independence Day break. The Dow Jones Industrial Average is called down 0.4%, the S&P 500 down 0.5% and the Nasdaq Composite 0.6% lower.
On the UK political front, pressure is heating up on Prime Minister Boris Johnson, who is facing accusations of a ‘cover up’ over his appointment of Chris Pincher, who resigned as deputy chief whip last week.
Simon McDonald, the ex-permanent secretary at the Foreign Office, said an account given by Downing Street of how Pincher came to be made deputy chief whip was ‘not true’.
Pincher resigned last week over allegations he drunkenly groped two men at a private members' club.
Number 10 has been accused of shifting its account of shifting its account of what Johnson knew of Pincher's past conduct when he made him deputy chief whip in February.
Downing Street initially claimed that Johnson had not been aware of any ‘specific allegations’ against Pincher at the time of the February reshuffle.
But after reports over the weekend of repeated alleged instances of Pincher making unwanted sexual advances to men, it said that while the PM had known of concerns, they had been either ‘resolved’ or there had been no formal complaint and that any allegations were unsubstantiated.
Brent oil was quoted at $113.17 a barrel midday Tuesday in London, down from $113.66 late Monday. Gold stood at $1,806.90 an ounce, down from $1,808.30.
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