Global equity markets seem set to finish a tumultuous week on a firmer note as US stocks made a positive start and European bourses bounced off their lows, but nervousness that a decade-long bull market was nearing an end continued to stalk investors.
The S&P 500 and the Dow Jones Industrial Average jumped more than 1 per cent in initial trading. The Eurofirst 300 index was down 0.7 per cent, after falling as much as 1.7 per cent earlier on Friday.
Asian markets suffered a torrid Friday, capping one of the worst weeks in Hong Kong and Tokyo in recent history, with the Hang Seng closing on Friday with a 9.5 per cent drop for the week, its worst weekly performance in almost a decade. Japan’s Topix finished the week down 7 per cent, its biggest weekly fall in two years.
Despite Friday’s early recovery, markets were heading for the worst week since early 2016. Wall Street’s steep losses on Thursday pushed the benchmark index to a 10 per cent decline from its January high — the typical definition of a correction. The global losses have topped $5tn, according to S&P Dow Jones Indices.
“The equity market performed another stage dive while the crowd moved away,” observed Christopher Harvey, an analyst at Wells Fargo. “It wasn’t pretty.”
With the equity market sell-off moderating somewhat on Friday, US Treasury bonds began creeping down again, pushing the yield of the 10-year Treasury yield up by 3 basis points to 2.86 per cent.
Rising bond yields triggered this week’s mayhem, but much of the blame for the selling has fallen on the collapse of a two complex exchange-traded notes and algorithmic trading strategies then compounding the declines.
Analysts at Barclays, Bank of America and JPMorgan estimate that volatility-targeting traders will sell roughly $200bn of equities this week, leading to more pressure on markets.
Strategists warn volatility is likely to continue. The CBOE’s volatility index (Vix) was at 32.06 in European trading — above its long-term average of 20 but well short of the 50.3 reading achieved on Tuesday, which was the highest since 2015. The Vix ended at 33.46 on Thursday, having been as high as 36.17 and as low as 24.41.
“The trading pattern suggests that markets may now be susceptible to both fundamental and technical factors, but most importantly uncertainty that could keep volatility elevated and leave us in a choppier trading pattern than we have seen in some time,” said analysis from Goldman Sachs.
Investors yanked a record $30.6bn from global equities funds this week — the most on record according — with the US facing particularly heavy withdrawals.
US sell-off spreads to Asian markets
Outflows from US stock funds totalled $34bn in the five trading days to Wednesday, according to EPFR data compiled by Jefferies. Funds holding stocks from developed European countries also faced significant withdrawals of $3.4bn, while foreign investors pulled $7.7bn from Asia Pacific funds.
“Investors turned heavy sellers in equities,” said Kenneth Chan, strategist at Jefferies, who added that the outflow marked an abrupt turnround from January in which global equities funds posted record inflows.
In Asia, stock benchmarks closed down across the region, wiping out most of their gains from the previous two sessions. In Hong Kong, the Hang Seng closed down 3.1 per cent to end the week with a 9.5 per cent loss. Tokyo’s Topix closed down 1.9 per cent on Friday for a weekly loss of 7.1 per cent, while the Nikkei 225 was off 2.3 per cent to make it an 8.1 per cent fall for the week.
Over the week, Japan’s Topix has lost 7.1 per cent while the Hang Seng index has slumped 9.5 per cent.
Mark Dowding of fixed income house BlueBay Asset Management said: “Greed was running unchecked in January and so markets were due a dose of reality, or else the party risked getting out of hand.”
“We would also observe that what we witnessed was very much a technical correction, exacerbated by algorithmic trading . . . With substantial assets under management in these strategies, there is a risk that the rise of machines is a destabilising force in markets,” he added.
Marco Pirondini, head of US equities at Amundi Pioneer Asset Management, said the implosion on Monday of a product that allowed investors to bet on low volatility was a factor in the recent turmoil. The selling was subsequently compounded by funds that respond automatically to market turbulence.
“You now have these feedback loops,” Mr Pirondini said. “This is driven by technical factors in an over-leveraged market that had rallied for too long.”
However, strategists at JPMorgan said that while for equities this looked like the crisis seen in markets during 2015, other asset classes disagree. They said that in 2015, investors had to deal with an emerging markets crisis, widening credit spreads, a collapse in commodity prices and weak global growth.
“There were legitimate fears of a global recession. Now, the situation is exactly the opposite: global growth is very strong, US corporate earnings are at record highs (and continue to be revised higher), commodities have stabilised and the US dollar is weak,” JPMorgan strategists said.
“We also want to add that the new Fed chair, vetted by the current administration that uses the stock market as a scorecard, is highly unlikely to do anything to derail markets and the economic cycle.”