Turmoil in equity market

Global equity investors remained on edge on Friday at the end of a turbulent week in which UK and European markets suffered their heaviest losses for four years.

The global equity sell-off more than eradicated all this year’s gains as investors fled risky assets and volatility surged.

“Investors had become complacent about the outlook for the global economy, especially the US, and the prices of many risky assets had been bid to unsustainably high levels,” said Julian Jessop, at Capital Economics.

“It’s a classic risk sell-off after a very strong bull run – whatever has gone up the most, is going down the most,” said Robert Buckland, chief global equity strategist at Citigroup.

Falls had been aggravated by heavy selling by highly leveraged investors such as hedge funds.

Wall Street, which suffered its steepest one-day fall in equities since 2001 on Tuesday, remained under pressure on Friday.

The S&P 500 index was 1.1 per cent lower at 1,387.16, which left it 4.4 per cent weaker for the week. The Dow Jones Industrial Average was down 4.2 per cent on the week.

In Europe, the FTSE Euro-first 300 index suffered its biggest weekly fall since March 2003, dropping 5.2 per cent. In London, the FTSE 100 index fell 4.55 per cent, or more than 300 points, to 6,116.2, also its worst week since March 2003.

The Nikkei 225 Average in Japan ended the week down 5.34 per cent and the Shanghai Composite index fell 5.57 per cent. The yen climbed 3.3 per cent against the dollar and rose 3.2 per cent against the euro as investors cut back carry trade positions amid the wider turmoil.

The carry trade involves investors selling low-yielding currencies such as the yen to buy higher yielding assets elsewhere.

“Investors with long exposure to equities have had to cover their losses by liquidating profitable carry trade positions,” said Monica Fan, global head of FX strategy at RBC Capital Markets. “We have been seeing heavy buying of the yen with investors selling the euro, New Zealand dollar and sterling aggressively.”

Credit default swap trading topped a record €200bn (£136bn) this week, according to Deutsche Bank. The iTraxx Crossover index of mainly junk-rated credits saw huge volatility. After hitting a record low on February 22 of 168 basis points, the index this week went from 180bp to as wide as 238bp on Wednesday morning.