Markets around the world were battered overnight by a surge in volatility not seen since the days of late 2008 after Lehman Brothers collapsed, triggering the GFC.
In a series of dramatic moves, European markets fell by up to 3% and moved as a group into a correction (a fall of 10% or more from the most recent peak), Wall Street opened down, racked by a series of ‘mini flash crashes’ in a growing number of stocks which plunged and then rose – leading some analysts to blame automated trading systems run by hedge funds and other speculators for the surge in volatility.
But most astoundingly of all the world’s biggest and most liquid market – the huge US Treasuries market saw an unprecedented plunge in yields, and then an equally unprecedented surge back up in yields on all bonds, especially the benchmark 10 year security.
The US Treasuries market usually moves in a series of much smaller moves – a few basis points – overnight the yield on the 10 year bond plunged 0.35%, or 35 basis points – an unheard of fall – in an hour or so, and then rebounded by nearly the same amount. Moves of these unheard size are not supposed to happen, unless the US and world financial markets are under extreme stress.
The wild and rapid moves had some US analysts wondering if a big money centre bank somewhere in the world was in danger of collapse, such was the shocking size of the trading moves. The swing took the 10 year yield down to a day’s low of 1.86%, from around 2.19%. At 1.86% the yield was the lowest it has been for more than six months. That all occurred in roughly 90 minutes. It then rebounded in a series of fits and starts to end around 2.13%, down six basis points on the day and looking to go lower tonight.
Wall Street was down sharply – at one stage the Dow was off a massive 406 points, but as conditions eased and fear eased, investors returned, bidding shares higher and bringing the market back to where the losses were more in keeping with recent days.
After hours futures treading has Wall Street looking at another big loss tonight, unless there’s a circuit breaker somewhere in the world during today.
The Dow lost 1% or 173 points, the S&P 500 was down a mere 0.8% after losing heavily early on and being down close on 3%. The Nasdaq saw a late rebound to where it was only down 0.3%. But a series of weak profit reports from tech stocks such as Netflix and eBay will hurt the market tonight.
Oil fell to new multi year lows in the US and Europe (Brent) around $US81.60 a barrel and $US83.78 respectively. Gold again edged higher, up $US7 at $US1,242 an ounce in New York. Other commodity prices eased, led by metals and the Bloomberg Commodity Price Index hit a new five year low. In a move that generated concern, a $US100 million commodity hedge fund based in London said it was closing after only two years because of the tough trading conditions had crippled it.
Oddly the US dollar sold off, and that saw the Aussie currency jump more than a cent to regain the 88 US cent mark overnight and trade just above that level in a nervy Asian opening this morning.
Our market will start with a loss of more than 30 points, if trading in the share futures contract is any guide. Australian markets ended up around 30 odd point yesterday and ignored a 2.4% slump in Tokyo. They won’t be so sanguine today about moves elsewhere in the region.
Financial Times lead commentator, John Authers captured the night’s trading, especially well in this comment:
“Treasury bond yields do not tumble 35 basis points in the space of a few minutes every morning. There is no possible explanation for such a fall in the economic data that normally move the bond market, so Wednesday’s sudden plunge in Treasury yields, partially reversed at the time of writing, suggests that the market pathologies we all grew to know during the crisis of 2008 are returning.
"That alone is enough to spook anyone investing in equities. Such a fall in such a liquid market implies that someone, somewhere is under stress. Much like the “flash crash” of early 2010, which presaged a long period of volatility before the post-crisis rally resumed late the next year, it is a symptom of distress that cannot be ignored, even if the immediate effect on prices can quickly be reversed.”
So what triggered this sell off and surge in volatiltiy?
Falling inflation or growing signs of deflation in a number of countries – from China, to Sweden and Germany. On top of the already weak signs from falling orders, industrial production and exports, there’s increasing fears the eurozone is on the edge of a slide into a deflationary recession.
British inflation fell sharply in a surprise and unemployed fell by more than forecast, but other news this week has cast doubt on the longevity of the UK’s mini boom.
And US producer prides fell by 0.1%, not rose as expected. The culprit was falling oil and energy prices in the US, but also the UK, China, the Eurozone and a growing list of other countries.
While good news for consumers and business, the dramatic slide in oil prices is adding to the deflationary pressures already squeezing some economies, such as Italy, Sweden, Portugal.
Japan is a worry – government bonds there fell to near record lows yesterday (and there was that shock 2.4% slump in the sharemarket), which is not supposed to be happening if the stimulatory policies from the government and the central bank are working.
A survey of manufacturing in the New York region dropped sharply and by more than expected, sparking fears the US economy was losing strength.
And US retail sales in September fell for the first time in eight months, taking the market by surprise. But that was giveback after the strong 0.6% rise in August. However, matching this shock, the mighty Wal Mart cut its estimated sales growth figure from a range of 3% to 5%, to just 2% to 3%.
