Investors have been warned that markets could have much further to fall if the current global sell off becomes a genuine correction, as the tone of US Federal Reserve members becomes increasingly hawkish.
At lunchtime, before US markets had opened, the FTSE 100 was down 1.4 per cent to 6,679 having recovered some losses from opening, while the FTSE 250 was down 1.5 per cent.
“We have been expecting some sort of sell-off in markets after the rebound following the Brexit vote,” Architas investment director Adrian Lowcock says.
“At present, markets haven’t moved significantly and there could be much further to fall before this becomes a genuine correction.
“Now is perhaps the time to protect yourself, the time to buy may come later.”
The S&P 500 on Friday suffered its biggest daily drop since the UK voted to leave the European Union on Friday, falling 2.45 per cent and wiping out two months of gains.
US Federal Reserve Bank of Boston President Eric Rosengren said in a speech in Massachusetts that he saw a “reasonable case” for a gradual rate rise.
Today, Fed official Lael Brainard, one of its most dovish members, will make a speech, before the central bank implements its blackout period before its September meeting. Any positive comments could signal further pain for markets.
In the case of a continued sell off, Lowcock recommends defensive funds, gold and cash, suggesting the Newton Real Return, BlackRock Gold & General and iShares Physical Gold ETC.
However, AJ Bell investment director Russ Mould remains unconvinced a rate hike is likely at the meeting on 21 September.
“The markets have been spooked by hawkish comments from the Fed which has led to a sell-off in US markets. However, the Fed has talked of further interest rate rises in the run up to previous meetings and done nothing.”
Mould says if similar hawkishness were to be experienced in the UK markets would be deeply unsettled.
“It would likely drive Sterling up and a weak domestic currency has been one of the main factors in supporting UK share prices since the initial shock of the Brexit vote subsided.”