Asian shares fell sharply on Tuesday after Wall Street suffered its biggest decline since 2011 as investors’ faith in factors underpinning a bull run in markets began to crumble.
MSCI’s broadest index of Asia-Pacific shares outside Japan dropped 2.8 per cent to one-month low, which would be its biggest fall in more than a year and a half, a day after it had fallen 1.6 per cent.
Japan’s Nikkei dropped 4.6 per cent. Australian shares dropped 3.0 per cent to their lowest level since October while South Korean shares dropped 2.0 per cent. All three broke below their 100-day moving average, a major support.
US stocks also plunged in highly volatile trading on Monday, with the Dow industrials falling nearly 1,600 points during the session, its biggest intraday decline in history, as investors grappled with rising bond yields and potentially higher inflation.
“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.
The benchmark S&P 500 fell 4.1 per cent and the Dow 4.6 per cent, suffering their biggest percentage drops since August 2011 as a long-awaited pullback from record highs deepened.
The S&P 500 ended 7.8 per cent down from its record high on 26 Jan. Before Monday’s fall, the index had not seen a pullback of over 5 per cent for more than 400 sessions, which analysts say was the longest such streak in history.
The trigger for the sell-off was a sharp rise in US bond yields following Friday’s data that showed US wages increasing at the fastest pace since 2009, raising the alarm about higher inflation and with it potentially higher interest rates.
The 10-year US Treasuries yield rose to as high as 2.885 percent on Monday, its highest in four years and 47 basis points higher than the 2.411 per cent seen at the end of 2017. It pulled back to 2.709 per cent on a continued rout in equity markets.
The CBOE Volatility index, the closely followed “fear-index” measure of expected near-term stock market volatility jumped 20 points to 30.71, its highest level since August 2015.
“For the last several months, whether it’s stocks or commodities, risk-takers had been the winners. And that’s what hedge funds, which now manage $3.2 trillion, have been doing,” Mitsubishi UFJ’s Fujito said.
“Their leveraged position is now being unwound. And it seems as though there are still some people who haven’t run away (from the sell-off) yet. I would expect more instability,” he added.
European shares also tumbled, with Germany’s Dax hitting a 4-month low.
Yoshinori Shigemi, market strategist at JPMorgan Asset Management, said the spectre of inflation will gradually undermine the attraction of equities even though the markets could rebound in the short-term.
“In the end, the Fed will have to hike rates. And if it doesn’t, long-dated bonds will be sold off on worries about inflation. Either way, that is going to slow down the economy. Rising wages also mean corporate profit margins will be squeezed gradually down the road,” he said.
Keen to avoid further risk, investors are closing their positions in other assets, including the currency market where a popular strategy has been to sell the dollar against the euro and other currencies seen as benefiting from higher interest rates in the future.
The euro eased to $1.2380, not far from last week’s low of $1.2335, a break of which could usher in further correction after its rally to a 3-year high of $1.2538 by late last month.
Against the yen, which is often used as a safe-haven currency because of Japan’s solid current account surplus, the dollar slipped to 109.05 yen, having lost one percent on Monday.
Bitcoin also tumbled, hitting a 12-week low of $6,600 . That represented a 66 per cent fall from its record high of $19,666, touched on 17 Dec. It last stood at $6,986.
Investors also dumped junk bonds, with the yield of Merrill Lynch US high yield index rising to 6.017 per cent from 5.964 per cent at the end of last week.
Still, it was far below its 2016 peak just above 10 per cent, when low oil prices hurt energy firms.
Oil prices also dropped, with international benchmark Brent futures hitting a one-month low of $66.90 per barrel on Monday. It last stood at $67.02.
US crude futures traded at $63.56 per barrel, down 0.8 percent in Asia.
US stocks plunged in highly volatile trading on Monday, with both the S&P 500 and Dow Industrials indices slumping more than 4.0 per cent, as the Dow notched its biggest intraday decline in history with a nearly 1,600-point drop and Wall Street erased its gains for the year.
The declines for the benchmark S&P 500 index and the Dow Jones Industrial Average were the biggest single-day percentage drops since August 2011, a period of stock-market volatility marked by the downgrade of the United States’ credit rating and the euro zone debt crisis.
The question now for investors, who have ridden a nearly nine-year bull run, is whether this is the long-awaited pullback that paves the way for stocks to again keep rising after finding some value, or the start of a decline that leads to a bear market.
“A lot of people who have been in this market for the past three or four years have never seen this before,” said Dennis Dick, a proprietary trader at Bright Trading LLC in Las Vegas. “The psychology of the market changed today. It’ll take a while to get that psychology back.”
After regular trading hours on Monday, S&P 500 E-mini stock futures rose 0.73 per cent, suggesting some traders expect Wall Street to open with a gain on Tuesday.
Bulls argue that strong US corporate earnings, including a boost from the Trump administration’s tax cuts, will ultimately support market valuations. Bears, including short sellers that bet on the market decline, say that the market is over-stretched in the context of rising bond yields as central banks withdraw their easy money policies of recent years.
The US stock market has climbed to record peaks since President Donald Trump’s election, on the prospect of tax cuts, corporate deregulation and infrastructure spending, and it remains up 23.8 per cent since his victory. Trump has frequently taken credit for the rise of the stock market during his presidency, though the rally and economic recovery was well underway during the Obama administration.
As the stock market fell on Monday, the White House said the fundamentals of the US economy are strong. US economic growth was running at a 2.6 annualized rate in the fourth quarter last year and the unemployment rate is at a 17-year low of 4.1 per cent.
On Monday, the financial, healthcare and industrial sectors fell the most, but declines were spread broadly as all major 11 S&P sectors dropped at least 1.7 per cent. All 30 of the blue-chip Dow industrial components finished negative.
With Monday’s declines, the S&P 500 erased its gains for 2018 and is now down 0.9 per cent in 2018. The Dow is down 1.5 per cent for the year.
The market’s pullback comes amid concerns about rising bond yields and higher inflation which were reinforced by Friday’s January US jobs report that prompted worries the Federal Reserve will raise rates at a faster pace than expected this year.
“The market has had an incredible run,” said Michael O’Rourke, chief market strategist At JonesTrading In Greenwich, Connecticut.
“We have an environment where interest rates are rising. We have a stronger economy so the Fed should continue to tighten ... You’re seeing real changes occur and different investments are adjusting to that,” O’Rourke said.
The Dow Jones Industrial Average fell 1,175.21 points, or 4.6 per cent, to 24,345.75, the S&P 500 lost 113.19 points, or 4.10 per cent, to 2,648.94 and the Nasdaq Composite dropped 273.42 points, or 3.78 per cent, to 6,967.53.
On Monday, the S&P 500 ended 7.8 per cent down from its record high on 26 Jan, with the Dow down 8.5 per cent over that time. The declines come after the Dow and S&P posted their biggest weekly percentage drops since January 2016 last week, and the Nasdaq posted its biggest weekly drop since February 2016.
At one point, the Dow fell 6.3 per cent or 1,597 points, the biggest one-day points loss ever. Even with the sharp declines, stocks finished above their lows touched during the session.
“It doesn’t look like people are working their orders – the programs are trading this,” Dan Ryan, who works on the New York Stock Exchange floor for E&J Securities, said as he was leaving work for the day.
Investors also unloaded riskier corporate bonds during the Wall Street stock market rout. Exchange-traded funds that focus on junk bonds suffered a third day of losses. BlackRock’s iShares iBoxx High Yield Corporate Bond ETF, which has about $16 billion in assets, fell 0.6 percent to its lowest share price since December 2016.
The CBOE Volatility index, the closely followed measure of expected near-term stock market volatility, jumped 20 points to 30.71, its highest level since August 2015.
“One thing is that going into the last week or so, investor bullishness was in the top decile of its historical range, which suggests that investors were pretty optimistic, with high expectations and largely complacent,” said Jack Ablin, chief investment officer with Cresset Wealth Advisors in Chicago. “There’s kind of an emotional reversal that’s going on.”
About 11.5 billion shares changed hands in US exchanges on Monday, well above the 7.6 billion daily average over the last 20 sessions.
Declining issues outnumbered advancing ones on the NYSE by a 8.64-to-1 ratio; on Nasdaq, a 6.92-to-1 ratio favored decliners.
The S&P 500 posted 1 new 52-week highs and 38 new lows; the Nasdaq Composite recorded 17 new highs and 164 new lows.