Wall St tumbles at the open in global stock market rout
US stocks suffered a steep drop at the open on Tuesday as a sell-off that began late last week and has reverberated across global markets intensified, shattering an extended period of calm on Wall Street.
The Vix volatility index, known as Wall Street’s fear gauge, briefly touched 50, its highest level since the Chinese currency devaluation of August 2015. The rapid rise in Vix from 14 on Friday deepens the pressure on investors who have sold financial instruments that provide a hedge against rising volatility.
The benchmark S&P 500 slid roughly 2 per cent at the open, a day after the US market suffered its biggest percentage fall since August 2011, and pushed the index close to a technical correction of 10 per cent. The losses were initially triggered by investor concern that an era of cheap money is drawing to a close in the face of renewed inflationary pressures.
The Dow Jones Industrial Average dropped more than 2 per cent on Tuesday, pushing it more than 10 per cent from its all-time high set in January. On Monday, the S&P 500 index ended the day 4.1 per cent down and the Dow dropped 4.6 per cent or 1,175 points — its steepest ever fall in points.
The latest slide by US stocks followed steep losses in Asia in overnight trade. Japan’s Topix index was down by more than 6 per cent at its low point before closing 4.4 per cent lower, while the Nikkei 225 finished down 4.7 per cent. In Hong Kong, the Hang Seng index dropped 5.5 per cent.
In turn, the rout spread to Europe where the FTSE 100 lost 2.1 per cent and the Xetra Dax 30 fell 2.5 per cent, with financial stocks continuing to take the biggest toll. The Europe-wide Stoxx 600 sank 2.6 per cent, with all three indices testing session lows after of the US open.
“I still think this is a continued reaction to the very rapid rise in interest rates and inflation expectations over a short period of time. That has the market spooked,” said Michael Arone, chief investment strategist at State Street Global Advisors. “We are just seeing some continued selling after a very long period of a complacent environment.”
Torsten Slok, chief international economist at Deutsche Bank, said: “Markets are coming to the conclusion that the US economy is close to overheating and therefore that the risks of inflation are bigger than the risks of a recession.
“Higher inflation risk means higher short and long rates. With valuations stretched in both equities and credit, risky assets are more vulnerable to higher interest rates than before. The allocation of money from risky assets to risk-free assets is going to be bumpy.”
Stefan Koopman, an analyst at Rabobank, quipped: “Playtime is over, kids!”
“The dominance of passive over active investment — including the popularity of ETFs and other index tracking products — has set up an environment in which the size and speed of moves down could easily snowball. The market is positioned homogeneously, ie long the index, and is therefore selling homogeneously . . . Fasten your seat belts!”
The equity turmoil spurred buying of US Treasuries by investors seeking a relative haven. The yield on the 10-year US Treasury, which moves inversely to prices, continued to fall — down 8.3 basis points at 2.711 per cent. At its height on Monday, the 10-year yield reached 2.8850 per cent, a level last touched in January 2014.
As the yields fell, the dollar slipped against most of its major rivals. The euro moved up 0.2 per cent at $1.2393, with the pound up 0.1 per cent at $1.3968. The yen was 0.1 per cent stronger at ¥109.03 per dollar.
Yee Kok Wei, a fund manager at Fidelity International, said the “unusual plunge” in the US and Japanese stock markets was probably “technically driven” by algorithm or quantitative trades, as the economic environment and corporate earnings remain robust.
Jim Paulsen, investment management strategist at Leuthold Group, said: “The speed of this is like a flash crash at the end of the trading day.
“Either there are quantitative trades that are automatic or someone got caught awfully wrong.”
Analysts at Morgan Stanley said they had warned that a correction in Asia was “imminent”, and noted that Japan’s Topix was trading at a 20-year high in January.
But other strategists were more sanguine. Maneesh Deshpande, US equities derivatives strategist at Barclays, disagreed, saying that jump in Vix futures “was technical in nature and does not necessarily indicate a true increase in risk perception.”
Mark Haefele, global chief investment officer at UBS Wealth Management, said: “While the speed of the market declines over the past week is jarring, market declines of this overall magnitude are not uncommon.
“In our view, risks of the Federal Reserve raising interest rates too quickly and triggering a US recession over the next two years appear very low.”
|Rank||Date||Drop at low||Close (pts)||% at close|
|1||May 6 2010||-8.59%||1,128.15||-3.24%|
|2||Aug 8 2011||-6.68%||1,119.46||-6.66%|
|3||Aug 24 2015||-5.27%||1,893.21||-3.94%|
|4||Aug 18 2011||-5.27%||682.55||-4.46%|
|5||Mar 5 2009||-4.90%||1,200.07||-4.25%|
|6||Aug 4 2011||-4.82%||1,120.07||-4.78%|
|7||Aug 10 2011||-4.65%||1,120.76||-4.42%|
|8||Sep 22 2011||-4.50%||1,129.56||-3.19%|
|9||Feb 5 2018||-4.49%||2,648.8||-4.10%|
|10||Mar 30 2009||-4.43%||787.53||-3.48%|
|Source: Thomson Reuters|