Britain’s FTSE 100 plunges below 5,400

Britain’s FTSE 100 extended its recent decline into a fifth day on Thursday, plunging below the 5,400 mark, as investors fretted over the strength of the global recovery and sovereign debt on both sides of the Atlantic.

The UK index of blue chip shares slumped 3.43%, or 191 points, to 5,393 and the Mid-250 index sank 3.86%, or 424 points, to 10,570.

‘It is increasingly becoming apparent that this economic recovery will be slower and more difficult because both nations and (some) consumers are over laden with debt,’ said Louise Cooper, markets analyst at BCG Partners.

She added: ‘Repaying the loans will take longer and be more painful than we had previously anticipated. We are in a catch 22 situation, we desperately need growth to pay off the debt, but we cannot grow because of the amount of debt we owe.’

Meanwhile, sterling and the euro fell after the Bank of England and European Central Bank (ECB) earlier held interest rates steady on fears that hikes could further dampen economic growth. The pound lost 0.7% against the dollar to $1.632, while the single currency sank 1.23% to €1.416.

Wall Street fell even as official data showed that claims for unemployment benefits unexpectedly eased last week. The Dow Jones Industrial Average dropped 2.16% to 11,639; the Standard & Poor’s 500 index shed 2.47% to 1,229; and the Nasdaq Composite index tumbled 2.65% to 2,622.

New claims for unemployment insurance fell by just 1,000 to a seasonally adjusted 400,000 last week, the Labor Department said ahead of key monthly payrolls data. Economists had expected an increase to 405,000, according to a Reuters poll.

‘This report and recent trends in claims data suggest that the softness in the labour market may be beginning to subside,’ said Michael Gapen, economist at Barclays Capital. ‘We expect economic activity to improve in the second half of the year, which should result in better labour market conditions.’

But he added that while the ‘full unwinding’ of high oil prices and supply chain disruptions stemming from Japan’s multiple disasters – which led to much of the softness in the second quarter – appeared to be proceeding, it would will take time.

Earlier in the day, Spain paid sharply higher yields, or implied interest rates, to sell €3.3 billion of government debt, as its costs of borrowing approached unsustainable levels.

Spain and Italy’s borrowing costs edged close to euro-era highs after retreating slightly on comments from Jean-Claude Trichet, ECB president, who said the central bank would conduct special six month liquidity operations to help relieve tensions in eurozone financial markets.

The yield on benchmark Italian 10-year government bonds eased to 6.24% from a day high of 6.29%, while that on Spanish 10-year government paper hovered slightly below a day high of 6.34%.