LATE RALLY KEEPS MARKETS OUT OF BEAR TERRITORY.
Relentless drop in oil price
The relentless retreat of oil prices drove global stocks to the verge of a bear market Wednesday in a trading day marked by volatility, but their partial recovery was enough to give besieged investors some hope that equities may soon settle into greater stability.
The S& P/ TSX Composite at one point was down 466 points, before recovering to close down 159 points, or 1.33 per cent, to 11,843.11 — its lowest reading since 2013. Volatility marked trading in the U. S. as well, with the Dow Jones Industrial Average shedding more than 550 points in the early afternoon, before clawing back some of the loss to close down 249 points, or 1.56 per cent, to 15,766.74.
The red extended overseas to markets in Asia and Europe. London’s FTSE 100 closed down 3.4 per cent, officially putting the index into a bear market ( defined as a decline of 20 per cent or more from its recent highs). The FTSE All World index, which tracks the biggest global stocks, is also flirting with a bear market, down 19 per cent since last April.
But while the day was marked by red, fund managers said the midday rebound seen in North American markets suggested a vote of confidence for equities.
“There’s a re- pricing of risk going on, but the speed of the move, to me, has been way too fast,” said Greg Taylor, portfolio manager at Aurion Capital in Toronto.
“If you wanted to say a good thing about today, it’s that we got to the August lows and once we got there, it maybe caused people to say, ‘it’s time to cover shorts’ and we bounced back.”
Wednesday’s sell- off follows a week that has seen a relentless barrage of worrying news about the health of the world’s economy. The International Monetary Fund cut its global growth forecast for the year Tuesday, saying that slowing momentum in China represents a threat to global growth.
On Wednesday, the International Energy Agency warned that the oil market was at risk of “drowning in oversupply” as crude from Iran begins to flow again onto world markets as sanctions on that country are lifted. That has added to oil price woes, with the price for U. S. crude falling nearly 30 per cent this month alone. On Wednesday, prices touched US$ 27 a barrel, their lowest since 2003.
Stocks and commodities haven’t been the only assets f l ashing warning si gns. Credit spreads have also widened in the past week, with yields particularly rising in non-investment grade paper. Rising spreads are always a concern for the market, as stark divergence tends to signal economic trouble is ahead.
“In the last six to seven trading days, the tone has changed somewhat,” said Andrew Torres, chief executive officer at Lawrence Park Asset Management, which specializes in fixed income and credit assets. “We’ve just been impacted by the general risk-off tone.”
But credit spreads widening are not uncommon during market sell- offs and current moves don’t necessarily signal an impending crisis, he said.
“It feels to me as if it’s being dragged by what’s going on in the equity world, more than really leading the charge,” Torres said. “We still feel reasonably encouraged by the prognosis for the year. Of course, you don’t want to see this downdraft happen on a continuous basis, but this is manageable.”
While red ink has coloured returns f or many assets this month, a look at some sentiment indicators suggests i nvestors aren’t ready to panic just yet. The CBOE Vix volatility index, often called the stock market’s fear gauge, currently sits at 30, still below the levels seen during August’s sell- off. To put that in perspective, the index hit an all- time high of 89 in October 2008 during the height of the financial crisis.
But the reading suggests that nevertheless, volatility has increased in the past year, given the VIX routinely stayed below 20 for much of the past couple of years.
“We were in a very low volatility environment for the past few years, some of it due to the Fed having everyone’s back,” said Taylor. “More volatility is something everyone’s just going to have to get used to.”
DROWING IN OVERSUPPLY.