Here’s the state of play after one of the most dramatic 24 hours on global financial markets in years.
The blood-letting in stocks continued into the Asian trading day. Here’s where markets were at shortly before 4pm Sydney time:
- ASX 200: 5,797.00, -229.20 (-3.80%)
- Nikkei 225: 21,181.00, -1501.08 (-6.62%)
- Shanghai Composite: 3,412.55, -74.95 (-2.15%)
- Dow Futures: 23,251.0 -687.0 (-2.87%)
Remember, US equities have been on the biggest bull run in history. This pullback means the S&P500 is now at the level it was at in early December, so long-term investors are still well ahead. Strong markets should have healthy pullbacks, so seasoned observers aren’t panicking.
Two quick charts will put it in context. Here’s the Dow over the past week:
And here’s the chart over the past year:
Hence the absence of widespread panic. So far.
Don’t let that fool you into thinking, however, that everything will go back to the way it was. There has been a real shift in mood and caution rules financial markets once again.
The big unknown now is how far this sell-off has to run. Nobody can say.
The catalyst was Friday’s employment data out of the US which showed wages growing faster than expected. This triggered a bond sell-off on the view that inflation is making a comeback and that the Fed might need to raise rates faster than currently anticipated.
Right now there are two important technical forces at work:
- Forced liquidations: Investors who were positioned for continued rises in stocks will be closing out, adding momentum to the selling.
- Automated trading: What the trading algorithms make of this mess could be an important factor. Yousef Abbasi, global markets strategist at Jones Trading, said he suspected risk-parity funds, which allocate money according to risk, were to blame. “You had a sense of panic,” Abbasi told Business Insider. “These are models, these are complicated financial models with no human interaction. No one is saying we can rationalize this move.”
Volatility is back
A recap of some of what’s happened in the chaos:
- The volatility index or VIX — known as the stock market’s “fear gauge”, soared over 100% higher during Wall St trade on Monday.
- A mystery trader who has been betting on that happening has now made millions.
- Two exchange-traded products designed to return the inverse of the VIX exploded at the close of futures trading on Monday, seeing their combined value shrink from $US3 billion to $US150 million, according to estimates from Macro Risk Advisors. Credit Suisse is rumoured to have a sizeable position in one of these products and its stock was down more than 6% in after-hours trading.
Inside tip: many professional traders and investors love volatility, as it gives them a chance to make money.
As Linette Lopez writes in detail here, the answer’s in a single word: inflation.
Too much of it may prompt central banks to raise rates, which in turn would threaten the rate of economic growth.
Bruce Bittles, the chief investment strategist at Robert W. Baird & Co, had a neat summary of the dynamic that has led to the rapid snap-back in stocks. “Up until this point, when the market dipped, interest rates went down,” he told Business Insider’s Joe Ciolli. “The correlation between stocks and rates has now reversed, and that’s the problem the market faces. You can’t depend on rates going down as the market weakens.
“There are no safe havens with valuations at this level,” he continued. “There’s no place to hide.”
This is an important shift in markets, where “buying the dip” has been a reliable strategy stretching back years.
Bitcoin has been smashed again, falling towards $US6000.