Panic selling sweeps trillions off markets
Playtime is over, say analysts amid rising global volatility
STOCK markets nosedived as panic gripped trading floors across the world for a fourth day running yesterday, after nerves about higher US interest rates and overcooked valuations wiped $4-trillion (R48-trillion) off what just eight days ago had been record highs.
Europe’s main bourses were down about 2.5% and Wall Street futures pointed to more losses too as fear gauges of market volatility leapt to their highest level since a surprise devaluation of China’s currency in 2015.
The flashing warning signs left investors with little option but to seek traditional refuges such as gold and the dollar.
Benchmark government bonds – ironically one of the initial triggers for the sell-off – also gained.
Commodities remained gloomy, with oil and industrial metals all tumbling backwards as the year’s stellar start for risk assets rapidly soured.
“Playtime is officially over, kids,” analysts at Rabobank said.
“Rising volatility painfully reminds some investors that one-way bets don’t exist.”
The equity market sell-off had been viewed by some as a healthy correction after a rapid run up over the last year, but as it snowballed through Asia and Europe and looked to be on its way back to Wall Street, nerves were starting to fray.
Europe’s drop sent the region’s STOXX 600 to its lowest level in six months while the losses for MSCI’s 47-country world index broke $4-trillion as its drop since Friday neared 8%.
Wall Street’s Dow Jones and S&P 500 benchmarks had slumped 4.6% and 4.1% on Monday, their biggest drops since August 2011. It was also the Dow’s biggest fall on a pure points basis of all time and put it in the red for 2018.
There was intense trading activity, with the average daily volume on Europe’s blue-chip STOXX 50 surpassed by the middle of the session.
The euro STOXX volatility index, Europe’s main gauge of market anxiety, saw its biggest spike since the September 11 2001 attacks in the US. The better-known Wall Street VIX screamed above the 50 mark.
“This is not the end of the bull market, but it is the end of the super low volatility regime,” Natixis Investment Managers chief market strategist David Lafferty said.
“The last two days of trading have thrown a giant bucket of cold water on the short volatility trade and I think we’re now in for a prolonged period of elevated volatility generally.”
Mitsubishi UFJ Morgan Stanley Securities senior investment strategist Norihiro Fujito said: “Since last autumn, investors had been betting on the ‘Goldilocks’ economy – solid economic expansion, improving corporate earnings and stable inflation. But the tide seems to have changed.”
MSCI’s broadest index of Asia-Pacific shares outside Japan slid 3.4% overnight.
Taiwan’s main index lost 5%, its biggest slump since 2011, Hong Kong’s Hang Seng Index dropped 4.2% and Japan’s Nikkei dived 4.7%, its worst fall since November 2016, to four-month lows.
The original trigger for the sell-off was a sharp rise in US bond yields late last week after data showed US wages increasing at the fastest pace since 2009. That raised the alarm about higher inflation and, with it, potentially higher interest rates.
That could be painful for markets that have been propped up by central banks’ stimulus for many years.
The 10-year US Treasuries yield rose to as high as 2.885% on Monday, its highest in four years.
But the massive fall in share prices prompted an about-turn, which sent it back to as low as 2.662%.
German Bunds, Europe’s benchmark, saw yields fall 6 basis points, their biggest drop in over two months.
“Ten-year treasuries at four-year highs – does this herald the start of a bond bear market? Or are we simply returning to a more ‘normal’ cycle of higher yields and higher interest rates?” Heartwood Investment Management’s Graham Bishop asked.
The CBOE Volatility index, the closely followed measure of expected near-term US stock market volatility, jumped over 30 points to 50, its highest level since August 2015.
That left some popular exchangetraded products that investors use to benefit from calm market conditions facing potential liquidation.
Keen to avoid further risk, investors were closing their positions in other assets, including FX markets, where a popular trade has been to sell the dollar against the euro and other currencies seen as benefiting from higher future interest rates.
The euro was suddenly swiped back to $1.2353 as US traders began to buy up the dollar.
Oil prices continued to droop too, with Brent hitting a one-month low, before levelling off at $66.90 per barrel, down 1% on the day. – Reuters