Market sell-off seen as overdue
“I think what we’ve seen so far is not a cause for concern but obviously if these higher yields were to harden over a longer period of time, that would be restrictive to economic conditions, suppressing demand and thereby suppressing employment,” Mr. Kocherlakota said.
While both comments helped pare losses on Monday, they were not enough to lift equity markets into positive territory.
The S&P 500, which fell almost 2% in early trading, closed down 19.34 points or 1.2% at 1573.09.
The main U.S. benchmark has dropped 5.5% from its May 21 high but remains 10% above it 2012 closing value.
The S&P/TSX Composite, meanwhile, fell 158.8 points or 1.32% to close at 11,836.86, following a 235-point drop earlier in the session. It has now fallen 4.3% in the past four trading sessions and is down 4.8% year to date.
Other global benchmarks fared even worse, with China’s Shanghai Composite index perhaps the hardest hit. The CSI 300 fell more than 6% and into bear market territory on mounting concerns about the country’s banking sector.
CMC Markets analyst Colin Cieszynski said the main cause of the equity sell-off remains the U.S. Fed’s tapering announcement, but growing concerns about the health of China’s banking system aren’t helping.
“Over the weekend, the PBOC has been denying that China faces a cash crunch,” he said. “The street, however, appears to be taking these denials as being similar to struggling sports teams that deny they are about to fire their manager right before they fire the manager.”
Mr. Cieszynski said the current sell-off has been overdue and does not come as a surprise given the QE-fuelled rally of recent months and the fact that June has historically been one of the worst months for stocks.
He said U.S. indices have not fallen as much as their European or Asian counterparts and remain vulnerable, suggesting more losses are ahead.
Other analysts tend to agree, but don’t expect a major collapse in equities to transpire in the days and weeks ahead.
“Most believe once the Fed begins to taper its QE program, the stock market will suffer a significant correction,” said James Paulsen, chief investment strategist at Wells Capital Management.
“We disagree. despite some expected headline risk and volatility during the discussion phase leading up to actual tapering, we believe when the Fed does finally begin tapering it will actually improve investor confidence.”