Stocks suffer worst one-day fall in a year

Stocks suffered their worst one-day fall in nearly a year on Tuesday as new figures suggested the US might already be in a recession and other leading economies rebuffed US calls for a global economic stimulus package.

The S&P 500 dropped 3.2 per cent, marking its worst day since February 27, and bringing its losses so far this year to nearly 9 per cent – its worst start ever. The Eurofirst 300 index fell 3.15 per cent, while the FTSE 100 index lost 2.63 per cent.

Investors sold shares in response to data showing the US service sector contracted for the first time in nearly five years. The Institute for Supply Management’s non-manufacturing business activity index fell from a seasonally adjusted level of 54.4 in December to 41.9 in January. Investors had expected a reading of 53.

“At this point, I do not think anyone will be surprised if we see growth for the fourth quarter revised below zero, followed by a negative first quarter,” said Michael Kastner, portfolio manager at Sterling Stamos. Economists define a recession as two negative quarters of growth.

Jeffrey Lacker, Federal Reserve Bank of Richmond president, said in prepared remarks to banking leaders in Charleston, West Virginia, that he sees “the possibility of a mild recession’’ and added that further reductions in interest rates may be necessary.

“A slowing economy requires a lower inflation-adjusted interest rate,’’ he said. “The prominence of downside risks means that further easing ultimately may be warranted.’’

The ISM figures came out as it emerged that a weekend meeting of the Group of Seven leading economies would not agree on a concerted fiscal stimulus, nor on a regulatory package to address the turmoil in credit markets.

David McCormick, US Treasury undersecretary for international affairs, said it was “especially important” that other countries “take prudent steps to strengthen their economies’ demand components”.

His call received short-shrift from the finance ministries of Japan, Germany and the UK, which indicated they had no immediate intention of following the US fiscal stimulus package.

There was also little consensus among G7 countries on what regulatory steps were needed to address the financial turmoil.

The US Senate could vote as early as Wednesday on a domestic stimulus package worth $156bn – a combination of rebate cheques and business incentives – which is designed to stave off recession.

Republicans and Democrats have already sparred over whether the package should include benefits to seniors and disabled veterans, the extension of unemployment insurance and tax credits for renewable energy programmes.

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