FTSE 100: 7244.41 ▼ -7.98 (-0.11%)
Investors have woken up to painful losses this morning after heavy falls in US markets prompted a wave of selling.
The Dow Jones' 4.6% fall yesterday is the biggest since August 2011, as is the broader S&P 500's 4.1% drop, and other global markets have followed suit. Japan's Nikkei 225 closed 4.7% lower while Hong Kong's Hang Seng was down 5.1%.
For investors looking for some silver lining, European markets have at least lifted from the 3% falls at which they opened.
At the time of writing, the FTSE 100 had climbed from a low of 7,118 at the open to trade at 7,216, down 1.6% on the day. The German DAX was trading 1.8% lower and the French CAC 40 was down 1.5%. 'Futures' on the US S&P 500 have meanwhile climbed 2.6% from their lows.
The crucial question is whether today's falls represent an opportunity to pick up some bargains, or the start of something worse.
Alex Scott, chief strategist at Seven Investment Management (7IM), is remaining cautious, warning that the spike in stock market volatility has 'not yet played out and could well involve more wrenching trading sessions for investors'.
'We have been concerned by demanding equity valuations and by apparently complacent investor sentiment, evident in such low stock market volatility,' he said.
'With levels of volatility so low, there is a risk that a small rise could lead to a larger market reaction, as investors receive a reality check.'
Jim Reid, strategist at Deutsche Bank, meanwhile warned in September that the next financial crisis appeared inevitable, and would be likely sparked by a withdrawal of stimulus from central banks, coupled with higher inflation.
He argued that the sell-off of the last few days, sparked by fears of higher US interest rates following better-than-expected jobs data, showed 'how easy it would be to get to the next financial crisis if inflation really started to misbehave, as most of this price action stems from a hint of it'.
Reid said that prospects for global markets this year hinged on inflation, especially in the US. Should it rise dramatically, 'the glue that has held the "carry" trade - and associated multi-year risk rally - will start to unfold very quickly and the timing of the next financial crisis will be brought forward', he said.
While Scott isn't predicting the next financial crisis, his caution is reflected in the positioning of 7IM's funds. As 'multi-asset' funds, they are able to invest across different asset classes, and the group is holding high levels of cash and short-dated bonds, together with 'alternative' income strategies, which aim to be uncorrelated to the bond and stock markets.
'Our strategy over recent months has been to operate with some caution: to participate to a degree in the very strong stock market momentum, but to remain underweight equities overall, and looking to include other defensive measures where possible,' he said.
'We have been very wary of government bonds, especially gilts and European government bonds, where yields remain too low.'
But Fidelity fund manager James Bateman, who likewise runs 'multi-asset' funds, is more optimistic about prospects for shares, and can see buying opportunities ahead.
'My money remains on equities - but rotating (and buying on weakness) into "value" areas of the market that have lagged in the recent momentum-driven rally,' he said.
He welcomed the sell-off as a sign of health in stock markets.
'The tech-fuelled rally in the US had long lost any sense of reality in its valuations, the prospect of inflation remaining low forever could not last, and we have a new and untested Fed chair. It would be more worrying if markets didn’t react to all of this,' he said.
'At this stage of the cycle, the money is made by keeping your head when others are losing theirs.'
James Knightley, economist at ING, agreed the sell-off appeared to be a correction 'rather than the start of a broader re-evaluation for earnings'.
'The US economy is in great shape right now and the financial sector is in a more robust position than it was ahead of the last major sell-off,' he said.
'That is not to say that we won't see further falls in the coming days, but in an environment where growth is good and earnings are expected to rise globally, there are decent underpinnings.'