The City was left nursing its losses after a week of turmoil in commodity and stock markets that wiped £73bn off the value of UK shares.
Oil prices were in freefall on Friday, a fresh day of turbulence that followed a forecast from the International Energy Agency (IEA) that a glut of crude will persist for another year. Crude prices continued falling in New York after London’s FTSE 100 closed 135.27 points down at 5,952.78 – its lowest level since late September.
Dealers said the markets had been unsettled by concerns about the health of the Chinese economy, which has needed large quantities of fuel and raw materials for its rapid industrial growth, and the likelihood that the US Federal Reserve will next week raise interest rates for the first time in nine years. The value of China’s currency, the yuan, fell to a four-and-a-half-year low in anticipation that the Fed will act on Wednesday.
Gloom was deepened by news of the liquidation of Third Avenue, the biggest failure of a US mutual fund since the financial crisis of 2008. Third Avenue specialised in high-risk junk bonds and its closure amid mounting losses prompted speculation that other firms could also be in trouble as a result of tumbling markets.
The failure by the Opec oil cartel to announce production curbs on 4 December triggered the fall in the cost of crude, with knock-on effects on share prices. Saudi Arabia has been willing to tolerate a lower oil price as part of its campaign to kill off the US shale sector, and the markets are also braced for Iranian oil to hit the commodity markets following the end of the west’s sanctions. Falling oil prices are being seen as the result of the combination of excessive supply and weak global demand.
Mining and energy companies such as Anglo American and BP were once again among the biggest losers on a day that saw only three shares in the FTSE finish higher. London’s 2.22% drop – the seventh in a row – was mirrored by a 2.4% loss in Germany’s Dax index. Shares on the Paris bourse dropped 1.8%.
During morning trading on Wall Street, a barrel of benchmark Brent crude was changing hands at $37.68 – down 5% on the day and the lowest level for seven years. The Dow Jones industrial average shed 300 points by noon in New York.
With some analysts predicting crude could hit $30 a barrel over the coming weeks, falling oil prices are likely to keep inflation lower than the Bank of England has been expecting. The City expects November’s consumer prices index, due out on Tuesday, to show a slight positive turn, from -0.1% to 0.1%.
The first signs of the impact of plunging oil prices on the cost of living emerged on Friday as supermarkets cut the cost of petrol to below £1 a litre.
The IEA, which advises developed states on energy policies, said the glut was likely to continue. “World oil markets will remain oversupplied at least until late 2016 … although the pace of global stock builds should roughly halve next year,” it said in its monthly report.
It added: “As extra Iranian oil hits the market, inventories are expected to swell by 300m barrels. Concerns about reaching storage capacity appear to be overblown.
“Much of the excess oil will be soaked up by 230m barrels of new storage capacity additions, while US inventories are only 70% full. As inventories continue to swell into 2016, there will still be a lot of oil weighing on the market.”
Analysts said solid growth in retail sales in the US had removed one of the final obstacles to a tightening of policy, although in September a widely anticipated Fed move was delayed as a result of the last bout of severe global turbulence.
Chris Beauchamp, the senior market analyst at IG, the online trading company, said: “Once again China concerns have spiked just as a Fed rate decision looms. Continued yuan devaluation has been the main driver this time, but it has combined with the ongoing rout in oil and other commodity prices to produce a week of losses for equities.”
guardian.co.uk © Guardian News and Media Limited 2010