Another day of wild swings in the financial markets saw a loss for the day of over 4%

Wall Street was on Thursday heading for its toughest week in more than two years after fears of higher interest rates led to a fresh plunge in New York stocks.

Another day of wild swings in the financial markets saw more than 1,000 points wiped off the Dow Jones industrial average – a loss for the day of over 4%. It was the third drop of more than 500 points for the Dow in the last five days and the Dow is now down 10% from its peak on 26 January, a fall known as a “correction”.

The more broadly based measure of US share prices – the S&P 500 – and the tech-heavy Nasdaq index were also sharply lower as traders reacted nervously to concerns about rising inflation in the world’s biggest economy.

Wall Street was on Thursday heading for its toughest week in more than two years after fears of higher interest rates led to a fresh plunge in New York stocks.

Another day of wild swings in the financial markets saw more than 1,000 points wiped off the Dow Jones industrial average – a loss for the day of over 4%. It was the third drop of more than 500 points for the Dow in the last five days and the Dow is now down 10% from its peak on 26 January, a fall known as a “correction”.

The more broadly based measure of US share prices – the S&P 500 – and the tech-heavy Nasdaq index were also sharply lower as traders reacted nervously to concerns about rising inflation in the world’s biggest economy.

Ten-year bond yields climbed to almost 2.9%, with markets speculating about whether they would hit 3% over the coming days.

Rising bond yields – coupled with a strong signal from the Bank of England that an interest rate increase was on the way – added to expectations that the world’s major central banks were now firmly on course to wind down the emergency stimulus they have pumped through the financial system since 2009, driving an almost decade-long stock market rally.

“Things haven’t quietened down. Things are all over the place. The market is trying to find a bottom to this madness,” said Jason Ware, chief investment officer at Albion Financial Group.

“Now we are having acute attention on what happens in the bond markets, so when yields move up there is an unsettling feeling in the equity market.”

The market’s main gauge of volatility, the Vix index, fell to 29.82 on Thursday, more than twice what it was a week ago but down off a two-and-a-half-year high above 50 points hit on Tuesday.

Wall Street has already factored in an increase in borrowing costs when the Federal Reserve – America’s central bank – next meets in March.

But evidence of rising wages contained in the latest report on the state of the US labour market, which was released last Friday, has convinced the financial markets that interest rates will go up faster and to a higher level than they had previously been expecting.

The Bank of England governor, Mark Carney, said it was “certainly healthier when markets have two-way risk around prices” after an extended period of calm over the course of the past year. “One hesitates to say welcome but it’s not an entirely surprising development,” he said.

However, the governor said the banking system was better equipped to deal with sharp moves in the financial markets. “We feel quite strongly that the core of the system is in an entirely different place,” he added.

“There is not the amplification from the core of the system by volatility, if anything it will dampen it.”

Wall Street began the week with a fall of almost 1,200 points in the Dow, which was half recouped by a big jump in share prices on Tuesday. The rollercoaster week continued when a near-400 point rise on Wednesday was wiped out in the last few minutes of trading.

In the City, the FTSE 100 closed down 108.73 points at 7,170.69, a drop of 1.5%. Since the start of the week, the FTSE has fallen almost 4%, wiping £72bn off the value of the UK’s leading companies.

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