Stocks slump af­ter surge in global sales

Wall Street’s worst losses in eight months trig­gered a storm that also hit Asia and emerg­ing mar­kets

Cape Times - - WORLD - MARC JONES

EURO­PEAN stocks slumped to a 21-month low yes­ter­day af­ter Wall Street’s worst losses in eight months trig­gered a surge of global sell­ing that also hit Asia and emerg­ing mar­kets.

Losses in Lon­don, Paris and Mi­lan were at nearly 2 per­cent ahead of what looked set to be an­other early dive from Wall Street, al­though it wasn’t quite as dra­matic as the overnight ses­sion in Asia.

MSCI’s broad­est in­dex of Asian shares not in­clud­ing Ja­pan ended down 3.6 per­cent, hav­ing struck its low­est level since March 2017. China’s main in­dexes had slumped over 5 per­cent.

It meant MSCI’s 24-coun­try emerg­ing mar­ket in­dex was hav­ing its worst day since early 2016, af­ter Wall Street’s swoon had given the 47-coun­try world in­dex equiv­a­lent its worst day since Fe­bru­ary.

“Eq­uity mar­kets are locked in a sharp sell-off, with con­cern around how far yields will rise, warn­ings from the IMF about fi­nan­cial sta­bil­ity risks and con­tin­ued trade ten­sion all driv­ing un­cer­tainty,” said an­a­lysts at ANZ.

The sell-off, which came as the head of the IMF, Chris­tine La­garde, said stock mar­ket val­u­a­tions have been “ex­tremely high”, erased hun­dreds of bil­lions of dol­lars of global wealth.

Ja­pan’s Nikkei ended down 3.9 per­cent, its steep­est daily drop since March. The broader Topix lost around $207 bil­lion (R3 tril­lion) in mar­ket value, fall­ing 3.5 per­cent.

Shang­hai’s drop was its most se­vere since Fe­bru­ary 2016 and left it at its low­est level since late 2014. Shares in Tai­wan were even harder hit, los­ing 6.3 per­cent. Seoul’s Kospi in­dex dropped 3.8 per­cent.

“I think what hap­pened was that we were a max­i­mum el­e­va­tion of risk ap­petite and max­i­mum val­u­a­tion of (US) large caps and tech, so when you have that sit­u­a­tion you are al­ways vul­ner­a­ble,” said UBP macro and FX strate­gist Koon Chow.

Europe’s traders re­treated to the safety of Ger­man and other higher-rated gov­ern­ment bonds.

Ital­ian bonds aren’t on that list though, and though they squeezed through a e6.5 bil­lion debt sale, they saw more sell­ing amid on­go­ing con­cern about the coun­try’s fi­nan­cial health.

“It re­mains to be seen whether the ac­cel­er­at­ing eq­uity plunge is a healthy cor­rec­tion or the tip of the ice­berg,” Com­merzbank an­a­lysts said in a note.

Sink­ing global shares had raised the stakes for US in­fla­tion fig­ures which ended up com­ing in rel­a­tively tame. High in­fla­tion would only stoke spec­u­la­tion of more ag­gres­sive rate hikes from the Fed­eral Re­serve – one of the things that has spooked mar­kets.

On Wall Street, the S&P500’s sharpest one-day fall since Fe­bru­ary on Tues­day had wiped out around $850 bil­lion as the S&P top­pled over 3 per­cent and the Nas­daq’s high-fly­ing tech shares tum­bled even more on fears of slow­ing de­mand.

The blood­let­ting at­tracted the at­ten­tion of US Pres­i­dent Don­ald Trump, who pointed an ac­cus­ing fin­ger at the Fed for rais­ing in­ter­est rates.

“I re­ally dis­agree with what the Fed is do­ing,” Trump told re­porters be­fore a po­lit­i­cal rally in Penn­syl­va­nia. “I think the Fed has gone crazy.”

Hawk­ish com­men­tary from Fed pol­i­cy­mak­ers trig­gered the sell-off in Trea­suries last week and sent long-term yields to their high­est in seven years.

The surge made stocks look less at­trac­tive com­pared with bonds while also threat­en­ing to curb eco­nomic ac­tiv­ity and prof­its.

“The rise in Trea­sury yields has been the pri­mary cat­a­lyst for the sell-off in eq­ui­ties, since higher yields sug­gest a lower present value of fu­ture div­i­dend streams, as­sum­ing an un­changed eco­nomic out­look,” said Steven Fried­man, se­nior econ­o­mist at BNP Paribas As­set Man­age­ment.

“It is also pos­si­ble that eq­uity in­vestors are grow­ing con­cerned that the Fed­eral Re­serve’s pro­jected rate path will choke off the ex­pan­sion.”

The shift in yields is also suck­ing funds out of emerg­ing mar­kets. More than $1 tril­lion has been wiped off MSCI’s EM in­dex since Jan­uary and there has been par­tic­u­lar pres­sure on the Chi­nese yuan as Bei­jing fights a pro­tracted trade bat­tle with the US.

China’s cen­tral bank has been al­low­ing the yuan to grad­u­ally de­cline, break­ing the 6.9000 bar­rier and lead­ing spec­u­la­tors to push the dol­lar up to 6.9377 at 8am.

China’s move has forced other emerg­ing-mar­ket cur­ren­cies to weaken to stay com­pet­i­tive and drawn the ire of the US, which sees it as an un­fair de­val­u­a­tion.

“The yuan has al­ready weak­ened sig­nif­i­cantly, to off­set the tar­iffs an­nounced so far,” said Alan Ruskin, Deutsche’s global head of G10 FX strat­egy. “Fur­ther weak­ness could ex­ac­er­bate con­cerns of a self-ful­fill­ing flight of cap­i­tal and a loss of con­trol.”

The dol­lar was al­ready los­ing ground to both the yen and the euro, as in­vestors favoured cur­ren­cies of coun­tries that boasted large cur­rent ac­count sur­pluses.

The euro was at $1.1550, up from a low of $1.1429 early in the week. The dol­lar lapsed to 112.17 yen, a re­treat from last week’s 114.54 peak.

Oil prices skid­ded in line with US eq­uity mar­kets. Brent crude fell 1.6 per­cent to $81.75 a bar­rel. US crude dropped 1.5 per­cent to $72.07.

| EPA-EFE

A BEAR and a bull at the Frank­furt Stock Ex­change. Global mar­kets tum­bled fol­low­ing a sell-off at New York Stock Ex­change on Wed­nes­day amid wor­ries re­lated to a trade war be­tween the US and China. The bull sym­bol­ises up­ward trends, the bear down­ward.

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