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The FTSE 100 index was down 134 points this morning, a loss of approximately 1.8%, but reflecting a sell off in UK equities that has been going on for most of the week.

This followed a large sell-off in US shares overnight, which saw the Dow Jones lose more than 800 points and heavy selling of US tech stocks like Intel and Microsoft which led to the worst single day on the Nasdaq since 2011. There was also heavy selling on Asia stock markets overnight, with both Tokyo and Japan having a bad time of it, but really this is just a reaction to events in the US.

Markets have been behaving strangely over the last few days. There had been concerns surrounding the Italian bond market last week, but right now the focus seems to be firmly on the Federal Reserve and its plans to continue to raise US interest rates. The Fed is looking to take some of the heat out of the US economy, and that is its remit, but it is invoking the ire of President Trump as he campaigns for US mid-term elections next month.

The key to Trump’s popularity with grass roots Republican voters at the moment is the way his administration has been able to kick start the US economy via a number of different initiatives, including tax cuts and a stimulus package. What Trump does not want, just before critical mid-terms, is for the Fed to spoil the party with further rate hikes.

This does seem to be what the US central bank has set out to do, however, and it has been very transparent about its rates policy. October is traditionally the month of big stock market sell offs, as we learned in 1987 and 2008. Decision makers in banks and fund managers tend to be in the office and able to make the big sell (or shorting) calls that will power the market downwards.

The VIX index spiked on Wednesday, as was up by more than 20% and the Dow futures market was implying a loss of about 300 points going into Thursday’s US trading session. The S&P 500 has been on a five day losing streak, which will be yielding profits for Contracts for Difference short sellers.

Thus far we have not seen any panic in the market – the fundamentals for the US economy remain strong, but some investors will be taking profits from a market that was already hitting historic highs. When that happens, active traders do take it as a signal to take some cash out of the market.

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Stuart Fieldhouse

Stuart Fieldhouse has spent over 20 years in journalism and financial communications, including six years as a wealth management correspondent for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong.

Stuart has worked as head of content at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Stuart continues to work with hedge funds, private banks, stock exchanges and other financial institutions on their communications, data and marketing requirements.

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