Shares lose £40bn US money printing end threat

Ben Bernankes comments on money printing to Congress sparked a sharp decline in global equity markets. Picture: Getty

THE FTSE 100 saw more than £40 billion or 2.1 per cent wiped off its value today as fears that the US may ease back on money printing, along with weak Chinese data, were compounded by doubts over the UK’s recovery.

The 143-point fall in London was echoed across Europe and markets in Asia saw even steeper drops with Tokyo’s Nikkei down 10 per cent at one point.

Signs that the US central bank may soon start scaling back the support measures that have been driving global equities higher came in comments from US Federal Reserve chairman Ben Bernanke. He told Congress late on Wednesday that, if economic improvement continued, the Fed could “take a step down in our pace of purchases”.

The prospect of the world’s most important central bank slowly turning the taps off could mark a profound turning point, although its officials have been at pains to stress that no action is likely for months yet.

Nick Beecroft, senior market analyst at Saxo Capital Markets, said markets were now in a “critical period”.

“Investors have to adjust for the fact that the Fed’s quantitative easing is not going to support the equity markets for an unlimited period.”

In the UK, better-than-expected economic growth in the first quarter turned out to have been boosted by a rise in inventories. With consumer spending also weak and a fall in investment, economists raised questions over whether the nascent recovery will last.

Confirmation from the Office for National Statistics that the UK avoided falling back into recession between January and March was marred by the weak underlying picture of the economy from final GDP figures which were first released in April.

Although the data confirmed the economy grew 0.3 per cent between January and March from the previous quarter, economists pointed to declines in investment and exports in the breakdown of figures as worrying signs.

“The breakdown of the data is rather disappointing and not that supportive to hopes that the economy is establishing a firmer footing,” said Howard Archer, economist at IHS Global Insight.

The biggest contribution to GDP growth came from an increase in inventories as companies’ stocks piled up in a likely sign of weak demand.

“There is still a significant part of the inventories move that might reflect an unwanted build-up of stocks that will be a downside to growth going forward,” said David Tinsley, an economist at BNP Paribas.

Yesterday’s data also showed consumer spending ticked up only 0.1 per cent on the quarter, its weakest rise since the third quarter of 2011, although it remained one of the economy’s main engines.

On Wednesday, the International Monetary Fund welcomed some signs this year that the economy is slowly healing but stressed it remained weak and called on the government to spend more now on investment to speed up the recovery.

Meanwhile figures from China showed factory activity shrank for the first time in seven months in May as new orders fell, adding to fears that its economic recovery has stalled and that a sharper cooldown may be imminent.

Commentators warned China’s ability to meet its 7.5 per cent growth target this year was increasingly difficult.