There was nervousness in world markets on Tuesday, amid a worsening in the trade dispute between the US and China.
Asian markets were turbulent overnight – China’s main index lost 1.5% and Tokyo closed 0.65% down, having been down almost 3% at one point.
Other countries that trade heavily with China also felt the pain – Australia fell by more than 2% and New Zealand by 1.7%. China is Australia’s top trading partner and New Zealand’s second.
The FTSE 100 dropped by 0.6% in early trading, with the worsening trade dispute hurting exporters and commodities-focused companies.
In the second hour of trading, however, it staged a slight recovery – up 0.05%, as other European markets steadied.
Markets.com analyst Neil Wilson said: “We’ve had such heavy selling I wouldn’t be surprised to see some bump-ups as bulls test the water for a dip.
“We should expect things to get worse before they get better.
“There is likely a bit more pain ahead, but I feel the market will eventually turn around.”
Wall Street suffered its biggest loss since December: the Standard & Poor’s 500 index dropped 3%, the Dow Jones Industrial Average lost 2.9%, and the Nasdaq composite fell 3.5%.
On Monday, the US accused China of being a currency manipulator, after the value of its currency the yuan fell sharply to an 11-year low.
The yuan has fallen 2.3% in the three days since US President Donald Trump announced he would impose 10% tariffs on $300bn (£247bn) of Chinese imports from September.
The fall was seen as Beijing trying to offset the incoming US tariffs by trying to make its products cheaper.
Stephen Innes, managing partner at VM Markets Pte, said Beijing had “unleashed their version of shock and that the yuan’s weakening had “sent a tsunami of risk aversion across global markets leaving a swath of market carnage in its wake”.
US Treasury Secretary Steven Mnuchin vowed to engage with the International Monetary Fund to eliminate what the Treasury described as an “unfair competitive advantage” created by Beijing.
By Tuesday the yuan had pulled back from an all-time low, however.
China’s official Communist Party newspaper accused the US of “deliberately destroying international order” and holding its own citizens to ransom.
Despite what Mr Trump has said in the past, tariffs are not paid by China but by US businesses exporting Chinese goods.
When US consumers buy the goods in their country, they face higher prices as importers look to recover costs.
Beijing’s Ministry of Commerce has also vowed to suspend promised purchases of US farm products, defying one of the US’s major conditions for a truce in the trade dispute.
Meanwhile, the pound was up 0.3% at $1.2176, not far from last week’s 31-month low, but it hit a new 23-month low against the euro of 92.49p.