- S&P500 futures sink 3 pct, down 12 pct from record high
- Nikkei down over 6 pct, ex-Japan Asia down 4 pct
- Specter of inflation undermines just right "goldilocks" trade
- 10-year U.S. bond yield falls back off 4-year peak
A rout in global equities deepened in Asia on Tuesday as inflation worries gripped financial markets, sending U.S. stock futures sinking further into the red after Wall Street suffered its biggest decline since 2011 in a vicious sell-off.
S&P mini futures fell as much as 3.0 percent to four-month lows in Asia, extending their losses from the record peak hit just over a week ago to 12 percent.
MSCI’s broadest index of Asia-Pacific shares outside Japan slid 4.3 percent, which would be its biggest fall since the yuan devaluation shock in August 2015, turning red on the year for the first time in 2018.
Japan’s Nikkei dived 6.8 percent to near four-month lows while Taiwan shares lost 5.5 percent and Hong Kong’s Hang Seng Index dropped 4.9 percent.
Monday’s stock market rout left two of the most popular exchange-traded products that investors use to benefit from calm rather than volatile conditions facing potential liquidation, market participants said.
The ructions in markets come after investors have ridden a nearly nine-year bull run, with low global rates sparking a revival in economic growth and bright corporate earnings.
That good times may be nearing at end if Wall Street is anything to go by. U.S. stocks 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.
“The amount of the sell-off that we are seeing is normal. The speed at which we are doing it is not normal,” said Michael Purves, chief global strategist at Weeden & Co in New York.
“Where does the market rout end? I think we are pretty close to a selling climax here. The fundamentals are pretty good. The only thing that is really different is that bond yields got up to 2.8 percent.”
The benchmark S&P 500 slumped 4.1 percent and the Dow 4.6 percent, suffering their biggest percentage drops since August 2011 as a long-awaited pullback from record highs deepened.
Before Monday’s fall, the index had not seen a pullback of more than 5 percent for more than 400 sessions, which analysts said was the longest such streak in history.
“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 trigger for the sell-off was a sharp rise in U.S. bond yields following Friday’s data that showed U.S. wages increasing at the fastest pace since 2009, raising the alarm about higher inflation and with it potentially higher interest rates.
“There is weakness across various equity sectors, but none so large the market is likely to fall through them. My money remains on equities – but rotating (and buying on weakness) into ‘value’ areas of the market that have lagged in the recent momentum-driven rally,” said James Bateman, chief investment officer for multi asset at Fidelity International,
“I’d also be avoiding stocks where dividend yields aren’t backed up by strong free cash flow and a solid balance sheet,” he added.
The 10-year U.S. Treasuries yield rose to as high as 2.885 percent on Monday, its highest in four years and 47 basis points above the 2.411 percent seen at the end of 2017.
But a massive fall in share prices prompted an about-turn, and in Asian trade on Tuesday, it fell back to as low as 2.662 percent.
Fed fund futures are now pricing in only two rate hikes this year, a sea change from only a few days ago when they priced in about 80 percent chance of three hikes with the market even rife with talk of four hikes.
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 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.
Yoshinori Shigemi, market strategist at JPMorgan Asset Management, said the specter 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 $1.2353, 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 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 0.4 percent to 108.56 yen, after having lost one percent on Monday.
Bitcoin was not spared from selling, falling more than 10 percent to a 12-week low of $6,116. That represented a 69 percent fall from its record high of $19,666, touched on Dec. 17.
Investors also dumped junk bonds, with the yield of Merrill Lynch U.S. high yield index rising to 6.017 percent from 5.964 percent at the end of last week.
Still, it was far below its 2016 peak just above 10 percent, when low oil prices hurt energy firms.
Oil prices also dropped, with international benchmark Brent futures hitting a one-month low. It last stood at $66.83 per barrel, down 1.2 percent on the day.
U.S. crude futures traded at $63.35 per barrel, down 1.3 percent in Asia.