UK markets suffer biggest drop in two years

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UK markets suffered their biggest drop for more than two years, falling below the 5000 mark.

The FTSE 100 dropped 63.4 points this morning to 4978. The fall comes after an slight rally early morning, when the index moved up 11.52 points to 5053.13.

The slight increases followed the FTSE 100 dropping nearly 5% on 22 September, falling 246.8 points to 5041.61 at close of day. It's now at its lowest level since March 2009.

The UK's 100 largest firms collectively saw £64 billion of their worth wiped out in a day as markets responded badly to a policy statement by the US Federal Reserve.

The Fed has announced plans to buy $400 billion of treasury securities that mature in the next six to 30 years by June next year, while also selling the same amount of securities that mature in three years or less.

Further deterioration to follow

In its statement, the Fed insisted that this course of action will "put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative".

However, Dominic Rossi, global chief investment officer for Fidelity Worldwide Investment, says: "Markets have reacted badly to the Fed's policy statement and European sovereign debt issues continue to rumble on.
"We should expect news over the next few weeks to deteriorate further. As we go into the earnings season shortly, there will be more missed forecasts and guidance from companies will be uncertain and gloomy."

In a press conference yesterday, managing director of the International Monetary Fund Christine Lagarde warned "the current economic situation is entering a dangerous phase."

On the same day, World Bank chief Robert Zoellick said the "world is in a danger zone", warning that the developing economies are "not as well-placed as they were in 2007/2008 to withstand another shock".

What should I do?

The topsy-turvy nature of the markets is a headache for investors. So what – if anything – should the average investor do?
Patrick Connolly, spokesperson for AWD Chase de Vere, says the most important thing is to not panic: "Nothing new has happened yet. We've known for a long time the state of the economy and markets. If you're investing then you should always be doing so with a long-term outlook and that means at some point the markets will recover.

"The only reason to change your portfolio is if you can't sleep at night – and should therefore not be investing. On the other hand, if you feel sufficiently confident you may want to take advantage of cheaper prices to expand your portfolio." 

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