Five reasons the FTSE is in 'correction'

The FTSE-100 index of leading UK companies fell for the eighth consecutive session on Thursday. It has now endured "the equal third-longest since the UK equities benchmark was introduced in 1984" and, having closed 10 per below its all-time high of 7,104 in April, is officially in "correction" territory, the Financial Times reports.

But what is causing the slump and will it continue?

1. Commodities rout

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Global commodities have been in retreat for a while, led by oil which has fallen by more than half from its peak a year ago and is in the grip of a renewed slide. The FTSE is particularly exposed to commodities firms and miners – the Wall Street Journal says it is made up of 6 per cent "basic resources companies" and a further 13 per cent "oil and gas companies" – which the FT notes explains the underperformance compared to European markets this year.

2. China concerns

China's economy, the second largest in the world, is not growing anything like as fast as it once was or international exporters had hoped. As a voracious consumer of commodities this has added to the rout and dragged down emerging market currencies, which analysts at Societe Generale told the Daily Telegraph was creating a "death spiral" in oil and metals prices.

3. 'Risk-off' investing

Markets are ultimately sentiment driven and with China in meltdown – its own benchmark exchange has plummeted 30 per cent this year – and most global equities and commodities indices in the red, there has been a switch to "risk off" trading and a rush to safe havens such as gold. Selling begets selling until something materially changes investors' views.

4. Automated trading

It's not something that is being widely discussed, but we can expect automated trading to be exacerbating losses. Many brokers will use systems that sell shares when they reach pre-determined lows to avoid extending losses, but which have the effect of amplifying a selloff.

5. Greece crisis – again

Greece is back in crisis again after securing a third bailout following the resignation of Alexis Tsipras. The political upheaval will, in the view of some analysts, imperil the country's ability to honour the terms of its agreement and therefore poses a risk that the eurozone will be thrown into fresh turmoil in the autumn.

Will it continue?

The FTSE is down again in early Friday trading at 6,325, only marginally above its 2015 low in January of 6,298. Most observers maintain that the underlying fundamentals of most UK companies not exposed to China or commodities remain strong, but the wider index remains vulnerable to further shocks in the short term.

More selective strategies that avoid the sector dragging down performance are, however, producing returns. Laith Khalaf, senior analyst at Hargreaves Lansdown, told Investment Week the FTSE-100 "has returned 0.5 per cent so far this year, including dividends, but if you strip out oil and mining stocks it has returned 4.8 per cent".