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FTSE muted as China COVID easing fails to offset US recession fears

People wearing masks cross a street in Shanghai, China. The FTSE was treading water after stock markets in Asia slumped
The FTSE was muted on Wednesday despite enthusiasm about China's shift in its tough zero-COVID policy. Photo: Aly Song/Reuters (Aly Song / reuters)

European stock markets lacked enthusiasm on Wednesday amid growing fears that the Federal Reserve's monetary tightening will tip the US economy into recession.

In London, the FTSE 100 (^FTSE) ended 0.2% lower on the day, while the CAC (^FCHI) was flat in Paris, and the DAX (^GDAXI) was lost 0.3% in Frankfurt.

‘’Fears are growing that economies are in for a rough time ahead as feverish inflation and the bitter interest rate medicine being used to bring it down take effect," Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said.

"Worries deepened amid warnings from US banking and media sectors that navigating through the storm would not be easy, while the latest data has shown China’s trade has been sideswiped by a drop in global demand and zero-COVID policies. Despite today’s easing of restrictions it’s clear China’s COVID nightmare is not at an end."

The muted mood followed an announcement that UK house prices fell at the sharpest pace in 14 years in November as interest rates surged. It was the fastest rate since October 2008 in the height of the financial crisis.

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According to lender Halifax, prices fell 2.3% last month, the third straight decline. This wiped almost £7,000 off the average price, which fell to £285,579 from £292,406.

A study by Bloomberg Economics estimated that house prices may fall by as much as 20% as the Bank of England (BoE) continues to push up the costs of borrowing.

Read more: House prices: Higher mortgages stalling property market

Threadneedle Street has already raised interest rates from 0.1% a year ago to its current 3% level, with further increases expected as soon as next week.

Michael Hewson of CMC Markets said: “Having seen another lacklustre and negative session for European and US markets yesterday there appears very little interest to drive markets higher in the short term, as we look ahead to next week’s central bank meetings from the Federal Reserve, as well as the European Central Bank and Bank of England."

Watch: Will UK house prices ever fall?

Across the pond, the S&P 500 (^GSPC) 0.3% lower by the time of the Europe close, and the tech-heavy Nasdaq (^IXIC) fell 0.7%. The Dow Jones (^DJI) edged 0.2% lower.

It came as reality knocked hopes for a soft economic landing in the United States while the American housing sector cooled last week, with mortgage applications dropping by 1.9%.

Applications for a new loan to buy a house fell 3% week on week, and were 40% lower than a year ago, and remortgaging applications jumped 4.7% – lured by a drop in 30-year mortgage rates.

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Joel Kan, an economist at the Mortgage Bankers Association which compiles the data, explains that “purchase activity slowed last week”

It came after warnings from big US banks about a likely recession next year pushed the S&P 500 lower for a fourth straight session on Tuesday.

Stock markets in Asia slipped overnight as China has been hit by a larger than expected drop in imports and exports.

China’s exports contracted 8.7% compared with a year ago in November, while imports tumbled 10.6%.

Read more: The true cost of Christmas revealed. And how to cut it

The negative session came despite enthusiasm about China's shift in its tough zero-COVID policy. The world’s second-largest economy has limited the scale of lockdown to individual apartment floors and buildings, rather than entire districts and neighbourhoods.

People who test positive for the virus will be able to isolate themselves at home rather than in overcrowded and unsanitary field hospitals, and schools where there have been no outbreaks must return to in-class teaching.

In Tokyo the Nikkei (^N225) fell 0.7% while the Hang Seng (^HSI) slumped 3.2% in Hong Kong, and the Shanghai Composite (000001.SS) dipped 0.4%.

Oil prices also rose 0.5% on Wednesday, with Brent futures (BZ=F) at $79.75 a barrel, back to where it began the year.

Watch: What are SPACs?