Fears of an early rise in US interest rates were eased on Friday by weaker than expected jobs data, helping to pull global markets out of the tailspin they had endured in another volatile week of trading.
But despite a recovery from their worst levels, shares still recorded a second day of declines. Both the UK and US markets have now fallen into negative territory for the year, after testing new highs not so long ago.
Stronger than expected US growth figures on Wednesday, which showed second quarter GDP up 4% on an annualised basis, along with hawkish comments from US Federal Reserve board member Charles Plosser, had prompted fears that the central bank may increase the cost of borrowing sooner than expected. Plosser objected to the guidance in the Fed's latest statement saying interest rates would remain low "for a considerable time after the asset purchase program ends". At the current rate, the monthly bond buying would be finished before the end of the year.
But Friday's non-farm payroll numbers from the US showed 209,000 jobs were created in July, lower than the bumper 298,000 the previous month and fewer than forecasts of about 230,000. This was the sixth consecutive month of 200,000 plus employment growth, the first time this has happened since 1997. But the unemployment rate rose unexpectedly from 6.1% to 6.2%, while average earnings, a figure carefully watched by the Fed for its inflationary impact, were flat at 2% year on year compared to expectations of 2.3%.
These slightly weaker than expected numbers suggested the Fed would be in no rush to raise rates from their current level of close to zero, and gave some support to battered share prices. James Knightley at ING Bank said: "As the pool of available labour continues to shrink we will see wages respond positively and inflation pressures within the economy will build. Consequently, we look for the Federal Reserve's commentary to gradually shift in the months ahead and favour a rate hike early in the second quarter of 2015."
Sean Lynch at Wells Fargo bank told Reuters: "The worry was that bad news would be bad for the market and good news would be bad for the market and we came right down the middle with this report. It still points to a job market and an economy that is improving, but we also have the absence of wage pressures building which [was] becoming another concern for investors."
Markets have suffered a turbulent few days, hit by a combination of rate rise concerns and growing geopolitical worries. The week saw Argentina defaulting for the second time in 12 years, while continuing tensions with Russia over the Ukraine led to the imposition of further sanctions which could hit businesses and put the brakes on global growth. According to Reuters, about 40 European blue-chip companies derive more than 5% of their revenues from the Russian market.
The violence in Gaza also added to the sense of events escalating out of control.
In Europe the troubled Portuguese bank Espirito Santo reported a quarterly loss of €3.6bn (£2.8bn), prompting talk of a possible emergency fundraising or state bailout and leading to its shares being suspended. The losses revived worries about possible contagion in the rest of the eurozone banking sector.
There were also mixed July manufacturing figures on Friday, with US and Chinese manufacturing moving ahead but the UK and eurozone PMI surveys coming in below expectations.
But following the US jobs figures, markets came off their worst levels. The FTSE 100 finished down 50.93 points at 6679.18 on Friday, having fallen as low as 6624. That was still a three day loss of nearly 130 points.
In Europe, Germany's Dax dropped 2% while France's Cac closed down 1%. In Japan, the Nikkei fell 97 points or 0.6% on Friday, hitting a one week low although strong earnings from companies including Sony limited the damage.
Meanwhile in the US the Dow Jones Industrial Average was down around 55 points by the time London closed. On Thursday the US index slumped more than 300 points – its worst daily performance since February – which wiped out all the gains made so far this year. It was only two weeks ago that the Dow hit a record high as the global economy seemed to be recovering and the withdrawal of central bank stimulus seemed to be proceeding according to plan.
In the foreign exchange markets, the dollar slipped back against a basket of currencies as the prospect of US rate rise receded.
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