The FTSE 100 Index slumped more than 2% today after markets across the globe were shocked by a downgrade of the US government’s debt outlook.
Key credit ratings agency Standard & Poor’s (S&P) cut the US’s outlook to negative from stable following concerns that the government will not be able to agree a plan to reduce the growing national deficit.
The shock report raised fears the world’s biggest economy could lose its AAA credit rating, and helped push London’s blue chip index down 125.9 points to 5870.
The pound was up to 1.14 against the euro, which fell following fresh fears of a eurozone debt crisis, but was down to 1.62 against the US dollar.
In America, the Dow Jones Industrial Average also slumped 1.6%. Elsewhere, the Dax in Germany was down 2.1% and France’s Cac-40 slipped 2.3%.
In its note, S&P said: “We believe there is a material risk that US policymakers might not reach an agreement on how to address medium and long-term budgetary challenges by 2013.”
Richard Hunter, head of UK equities at Hargreaves Lansdown Stockbrokers, said the announcement had taken the market by surprise, while Kathleen Brooks, research director at Forex, said the downgrade was a “shocker”.
The move sparked a rally in gold, seen as a secure investment, which hit a new high at one point in trading as it moved close to 1500 US dollars an ounce.
In a woeful day for the London market just two companies in the top flight made gains.
Heavily weighted banking stocks Barclays and Royal Bank of Scotland were among the biggest losers after Ireland said it will ask to reduce the interest rate on its emergency loan and high level talks began over Portugal’s bail-out.
Barclays, which has high exposure to the Iberian peninsula, dropped 11p to 290.7p, and Royal Bank of Scotland which is a major lender in Ireland, fell 0.9p to 41.8p. Lloyds Banking Group was also down 1.3p to 58.8p.
The negative sentiment also helped to weigh down miners and energy companies, with Antofagasta down 68p to 1304p and Anglo American off 155.5p at 2983p.
Medical devices firm Smith & Nephew was one of the biggest top tier fallers, on concerns any takeover interest from US healthcare group Johnson & Johnson may have been scuppered by its talks to buy Synthes. S&N fell 3%, or 21p to 675.5p.
Elsewhere, oil explorer Desire Petroleum plunged 63%, down 25p to 15p, after it failed to find oil at its Ninky well off the Falkland Islands.
And on the Alternative Investment Market, Crosby Asset Management saw its shares soar 44%, or 1.4p to 4.6p, after it emerged that the son of Russian billionaire and Chelsea Football Club owner Roman Abramovich was investing in the company.
Arkadiy Abramovich has taken a 26% stake in the company, which aims to buy up oil and gas assets, through his investment vehicle ARA Capital.
The biggest Footsie risers were WPP up 1p to 722p, and Serco 0.5p 555.5p.
The biggest Footsie fallers were Antofagasta down 68p to 1304p, Anglo American off 155.5p at 2983p, Resolution down 14.7p at 294.7p, and Aviva off 20.2p at 414.7p.