Update: Fears of another big hike in US interest rates pushed the dollar to a new high and sent oil prices tumbling, with sharp falls in commodity stocks causing the FTSE 100 to fall 1.4%. This leaves it down 6% for the year.

Wall Street got off to a poor start with JP Morgan Chase causing a selloff in bank stocks after reporting a worse-than-expected 28% drop in first quarter earnings.

With US investors still rattled by yesterday’s 9.1% inflation reading, which guarantees further interest rate rises by the Federal Reserve, the S&P 500 slid 1.6% to 3,742 and the Nasdaq technology index fell 1.4% to 11,088. 

Bank of America Securities cut its S&P 500 year-end forecast to 3,600 from 4,500 as it predicted a mild US recession this year, but gave a worst-case scenario of 3,000 to 3,200 if the contraction was more severe.

The pound plunged 0.7% to $1.1804 against a rampant dollar, which rose 0.6% to a new high against a basket of major currencies, as traders bet the Fed would push through 100 basis point in its funds rate this month.

The euro, weighed down by the energy crisis and news from Italy where prime minister Mario Drag’s government faces collapse after his coalition partner failed to support a confidence vote, stayed close to parity with the dollar.

The strong dollar and recession fears depressed Brent crude oil prices which dropped $2.22 to $97.33. Gold, the safe haven precious metal also priced in dollars, slid 1.7% to a one-year low of $1,704.89.

In response, the UK’s blue-chip benchmark extended its decline, dropping 102 points to 7,053. The mid-cap FTSE 250 index retreated 1.3% and the FTSE Small Cap slid 1%.

Europe saw steep falls after the European Commission slashed its eurozone growth forecasts for next year to 1.4% from 2.3% due to the impact of the Ukraine war and high energy prices.  Italy’s FTSE MIB slumped 3.4% with France, Spain and Germany declining 1.5%-1.9%.

10.00: Insurers tumble after Sabre warning

The FTSE 100 added to a week of losses as markets braced for a large US interest rate rise following red-hot inflation numbers, while insurers tumbled on the back of a profit warning from small-cap Sabre (SBRE).

The blue-chip index was down 1%, or 72 points, at 7,084 as investors digested yesterday’s US inflation data, which showed the cost of goods and services jumped 9.1% in the year to June versus 8.6% a month earlier. 

Neil Wilson, analyst at Markets.com, said: ‘Markets price in about a 75% chance that the Fed will raise rates by 100 basis points at its July meeting, pricing in much more aggressive tightening than prior to the report.

‘I think this is about right. The Fed has been very clear about where it stands on inflation and the strength of the labour market means there is no real reason not to go big.’

Insurers took a battering as Sabre issued a profit warning, sending its shares slumping 36%. The company announced a profit slump to £4.3m in the first six months of the year, down from £22.2m the previous year. 

The news had a knock-on effect on large-cap peer Admiral (ADM), which led the blue chips lower, shedding 7.8% to  £21.75, while Direct Line (DL) was a major loser on the FTSE 250, falling 6.3% to 221p.

Barratt Developments (BDEV) lost 3.2%, or 14p, to 450p despite completions returning to pre-pandemic levels and the housebuilder forecasting that profit will come in slightly ahead of expectations this year.

Richard Hunter, head of markets at Interactive Investor, said the fall proved ‘the growing chasm between the actual trading performance and the depressed share price peformances within the sector’.

Fears of a global economic slowdown continued to weigh on commodity stocks. Fresnillo (FRES) fell 2%, or 13p, at 670p, Rio Tinto (RIO) retreated 1.1%, or 53p, to £47.39, and Anglo American (AAL) eased 0.8%, or 22p, to £26.63.

The FTSE 250, which slipped 0.4%, or 67 points, to 18,644, was led lower by gaming technology business Playtech (PTEC). Shares slumped 16%, or 83p, to 432p after Hong Kong-based TTB Partners abandoned its bid, citing the challenging market environment. 

Streaming lifts SONG

In investment trust news, Hipgnosis Songs (SONG ) rose 3.7% to 112p on a 14% discount after the music royalties fund posted a 14.2% total return for the year to 31 March, 9.2% of it in the second half after stronger-than-expected growth in streaming revenues. The 5%-yielder paid 5.25p in cash-covered dividends.

Abrdn Private Equity Opportunities (APEO ) also gained 3.7% to 420p on a wide 44% discount as it reassured investors with a 1.7% increase in net asset value (NAV) last month. NAV per share rose to 727.3p on 30 June primarily from the strength of the euro against the pound.

Rival mid-cap private equity fund HgCapital (HGT ) added 2.5% to 320p from a 32% discount.