Rolling world stock sell-off runs to $4 trillion
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[February 06, 2018]
By Marc Jones
LONDON (Reuters) - World stock markets
nosedived for a fourth day running on Tuesday, having seen nerves about
higher interest rates and overcooked valuations wipe $4 trillion off
what just eight days ago had been record highs.
Europe's main bourses were down around 2.5 percent 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 selloff -- also
gained.
Commodities remained gloomy too, with oil and industrial metals all
tumbling backwards as the year's stellar start for risk assets rapidly
soured.
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"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 selloff 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 widely tracked 47-country world index
broke $4 trillion as its drop since Friday neared 8 percent.
Wall Street's Dow Jones and S&P 500 benchmarks had slumped 4.6 percent
and 4.1 percent 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 already easily 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 Sept. 11, 2001 attacks on the United
States. 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," said David Lafferty, Chief Market Strategist at
Natixis Investment Managers.
"The last two days of trading has thrown a giant bucket of cold water on
the short volatility trade and I think we’re now in for prolonged period
of elevated volatility generally."
GOLDILOCKS VS THE BEARS
"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," said Norihiro
Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley
Securities.
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MSCI's broadest index of Asia-Pacific shares outside Japan slid 3.4
percent overnight.
Taiwan's main index lost 5.0 percent, its biggest slump since 2011, Hong
Kong's Hang Seng Index dropped 4.2 percent and Japan's Nikkei dived 4.7
percent, its worst fall since November 2016, to four-month lows.
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![](../images/020618pics/busine52.jpg)
A share trader checks
his screens at the stock exchangee in Frankfurt, Germany, November
20, 2017. REUTERS/Kai Pfaffenbach
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The original trigger for the sell-off was a sharp rise in U.S. bond yields late
last week after data showed U.S. 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 U.S. Treasuries yield rose to as high as 2.885 percent 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 percent. 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?" said Graham Bishop, Investment Director at
Heartwood Investment Management.
REDUCING RISK
The CBOE Volatility index, the closely followed measure of expected near-term
U.S. stock market volatility, jumped over 30 points to 50, its highest level
since August 2015.
That left some popular exchange-traded 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.
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The euro had been clawing back ground but was suddenly swiped back to $1.2353 as
U.S. traders began to buy up the dollar.
That left the euro not far from last week's low of $1.2335, a break of which
could usher in a further correction after its rally to a three-year high of
$1.2538 by late last month.
Oil prices continued to droop too, with international benchmark Brent hitting a
one-month low, before leveling off at $66.90 per barrel, down 1 percent on the
day.
U.S. crude futures were trading down 1.3 percent at $63.33 per barrel, while
gold nudged up for a fourth day in the last five, to $1,340 per ounce.
"I think this is a healthy, albeit rather vicious correction (in equity markets)
and we may see more over the next week, but on the whole I really wouldn’t
panic," said broker Marex Spectron's head of precious metals, David Govett.
"As such, I don’t think gold will go a lot higher."
(Additional reporting by Hideyuki Sano in Tokyo and Helen Reid in London;
Editing by Catherine Evans)
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