New York: US stock indexes plummeted on Thursday morning as investors spooked by the health of the global economy jettisoned stocks and fled to safe-haven assets.
All three major indexes were down more than 1 per cent, led by financials, especially banks. All 10 major S&P sectors were lower.
Federal Reserve Chair Janet Yellen on Wednesday acknowledged tightening financial conditions and uncertainty about China and the risks that posed to the US economy, but still kept open the possibility of further interest rate hikes.
Globally, stocks fell sharply on Thursday. The dollar hit a 16-month low against the yen and investors migrated to gold and top-rated bonds. US Treasury security yields plunged to levels not seen since 2012 in some cases.
Prices on fed fund futures, used to predict future policy rates by the Fed, surged as investors further cut back expectations of another rate hike anytime soon after the first US rate hike in nearly a decade in December.
“The market is transitioning and attempting to stand on its own two feet. Central banks in general have been the market’s protectors over the last 8 years,” said Jack Ablin, chief investment officer at BMO Private Bank in Chicago.
European stocks were down over 3 per cent at a 2-1/2 year low led by another 6 per cent plunge in banks, and the Swedish crown tumbled as its central bank waded in with a surprise cut to its already deeply negative interest rates.
“What this shows is that the risk-off mode has come back very quickly and that the worst may still be to come in these markets,” said Rabobank European strategist Emile Cardon.
“What is different to previous times is that the bad news in now coming from everywhere, China, Portugal the US the commodity sector the banking sector. It’s like several smaller crises could combine into one big crisis.” There was just as much drama in the bond markets. Intense demand for ultra-safe US Treasuries drove longer-term bond yields to three-year lows and flattened the yield curve in a way that has presaged economic recession in the past.
Biggest beating
Benchmark European German Bund yields dropped sharply and UK yields hit an all-time. Traders dumped riskier Spanish, Italian, and in particular Portuguese bonds, which suffered their biggest beating in 2-1/2 years.
That came with Eurozone’s finance ministers with worries creeping back in about both Portugal and Greece’s ability to stick to the terms of their bailouts.
“Portugal needs to stand ready, if necessary, to do more, to stay within the Stability and Growth Pact. I is not a unique situation, we have had it with other countries,” the head of euro group Jeroen Dijsselbloem said in Brussels.
There was no sign of the frenetic pace easing as the start of US trading and another appearance in Congress later in the day by Yellen approached.
With the dollar attempting a claw back, Britain’s FTSE 100 recovered a touch to be down 2 per cent, Germany’s DAX
was 2 per cent lower, though Italian and Greek shares both held losses of around 5 per cent on their familiar banking sector and bailout worries.
The flight from risk had been bumpy in Asia too. Hong Kong — a favourite channel for global investors to play China — nose dived 4.2 per cent as investors there returned from the long Lunar New year holidays. Mainland China markets are closed all week.
MSCI’s broadest index of Asia-Pacific shares outside Japan shed 1.4 per cent, and South Korea resumed with a 2.9 per cent drop.
Wall Street had ended Wednesday mixed after Fed Chair Janet Yellen sounded optimistic on the US economy, but acknowledged risks from market turmoil and a slowdown in China.
Analysts took that to mean a hike in March was unlikely, but further tightening remained possible later in the year.
“Yellen made it clear that while the Fed still expects to continue on its gradual tightening path, policy was not on a preset course and would respond appropriately to developments,” said Justin Fabo, a senior economist at ANZ.
“The real test may come later, if markets continue to deteriorate and look to central banks to save them. Are policymakers’ guns loaded with blanks?”
Gradual pace
It seemed some were already preparing for the worst.
Longer-term US debt rallied hard as investors wagered that either the Fed would be unable to tighten at even a gradual pace, or that if it did hike it would only hasten the arrival of recession and deflation.
In a marked turnaround, yields on 10-year Treasuries fell to 1.5978 per cent, from a top of 1.773, and back to lows last seen at the end of 2012 when the Fed was busily printing money. Futures imply further price gains lie ahead.
As a result, the spread over two-year paper shrank to just 96 basis points, the smallest gap since late 2007 just before the global financial crisis hit.
Likewise, Fed fund futures are pricing in the shallowest of shallow tightening paths. The market implies a rate of 45 basis points for the end of this year, 60 basis points at the end of 2017 and 90 by the close of 2018.
The decline in US yields continued to drag on the dollar, which reached lows last seen in October against a basket of currencies.
The yen was again lifted by safe-haven flows, as befits Japan’s position as the world’s largest creditor nation. The dollar shot down to 111.36 yen to depths not delved since October 2014 though the talk of BOJ inventions pushed back up to 112.60.
The euro also weakened against its Japanese peer, sliding to a 2-1/2 year low of 126.06 yen before bouncing back above 127. Against the wilting greenback, the euro drove as high as $1.1355, its highest in three months.
The aversion to risk helped lift gold as far as $1,217.00 an ounce, clearing stiff resistance around $1,200.
