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Stock Markets Unsettled as Global Rout Persists Wall Street Unsettled After a Global Rout
(about 1 hour later)
A stock market rout that began in the United States took on global contours on Tuesday, as investors from Tokyo to London sent shares tumbling. Wall Street opened lower but then recovered. The sometimes-panicky global market sell-off eased somewhat on Tuesday morning, as the Standard & Poor’s 500-stock index bounced between positive and negative territory in early trading in the United States.
The sharp falls, including Wall Street’s drop of more than 4 percent on Monday, have come despite generally positive economic news around the world. There is strong growth on every continent, interest rates are at or near record lows, and the United States has just passed a sweeping tax overhaul that will significantly lower corporate taxes. President Trump has touted seemingly unending stock market highs as proof of improved economic prospects. After steep drops in Asia and significant declines in Europe, investors assessed whether Wall Street’s violent decline on Monday — when the S.&P. lost more than 4 percent, its worst decline since August 2011 — reflected actual fundamentals or was merely a long-overdue outbreak of investor jitters
But those positive factors have also, in part, created the circumstances for the recent sell-off. Accelerating growth means central banks are gradually looking to take away economic stimulus, and rising interest rates could eat into corporate profits. Workers, meanwhile, are increasingly demanding their share through wage increases. For months, markets seemed to sleepwalk ever higher, as measures of volatility — the ups and downs of stock prices — hit remarkably calm levels. Investors appeared to grow accustomed to an economic backdrop of lackluster growth and inflation, a state of affairs that ensured powerful global central banks would continue to support markets with a range of policies.
The declines were made worse by panic that stock values had peaked, that a correction was underway, and that investors would suffer even bigger losses if they waited too long to dump their holdings. But the peaceful climb ended in recent days. Investors have become worried that the solid economy in the United States could be showing early signals of inflation pressure. Those concerns drove yields on long-term Treasury bonds sharply higher in recent weeks, as economic data — such as the Labor Department’s jobs report last Friday — showed wages growing at their fastest clip in years.
While Mr. Trump has regularly pointed to increasing share prices as a sign of a strengthening economy, Vice President Mike Pence on Tuesday largely dismissed the latest falls as simply representing “the ebb and flow” of stock markets. Mr. Pence, who was speaking to reporters as he headed to Asia, said that the United States economy remained strong, pointing in particular to record-low unemployment and signs of accelerating wage growth. On Tuesday, investors in the United States appeared more inclined to view the economic news in a somewhat more favorable light. General Motors shares rose 3.7 percent after the automaker reported earnings that showed strong demand for its pickup trucks and S.U.V.s. The tech sector also pushed higher after the chip maker Micron Technology rose roughly 5 percent on favorable earnings news and upgrades from Wall Street analysts.
Traders, however, appeared to be preparing for another unsettled day. Economic data also suggested that the American consumer, a key economic player in an economy where consumption accounts for roughly 70 percent of economic activity, remains robust. The United States trade deficit surged in December as imported consumer goods rose sharply on solid consumer demand.
• The Dow Jones industrial average fell more than 500 points after the opening bell, but swiftly recovered those losses. The S.&P. 500 and Nasdaq also registered short-lived losses. In another sign that investors were shaking off some worries, yields on the 10-year Treasury note rose. Spooked investors had bought supersafe government bonds in recent days after being startled by the market sell-off, bringing yields lower. So, the rise in yields suggest investors are regaining their nerve. The United States dollar rose.
• Wall Street’s so-called fear gauge, the VIX index, shot up to its highest level since early 2009. The index tracks overall market volatility. But fears of volatility remain. Wall Street’s so-called fear gauge, the VIX index, shot up to its highest level since early 2009. The index tracks overall market volatility.
• European shares fell in morning trading after sharp declines in Asia. Stock markets in Frankfurt, London and Paris all declined by around 2.5 percent by midday in Europe. The brighter sentiment in the United States came as a relief after Monday’s rout spread to foreign markets overnight. Japan’s Nikkei 225 fell 4.7 percent and Hong Kong’s Hang Seng index dropped 5.1 percent.
• Japanese shares were down about 7 percent at one point, before ending 4.7 percent lower, while Hong Kong and Taiwan closed down about 5 percent. But in late European trading large indexes in France and Britain, while still in negative territory, erased some of their losses after the start of trading in the United States.
• The selling was broad, hitting companies of all sizes across many industries. An index of Chinese businesses listed in Hong Kong fell nearly 6 percent, while shares of all 30 companies listed on Germany’s benchmark DAX index were down. the VIX index, shot up to its highest level since early 2009. The index tracks overall market volatility.
In Europe, a decade of extraordinarily low interest rates is coming to an end. The European Central Bank is winding down the money-printing program known as quantitative easing and could begin raising its benchmark interest rate — currently zero — next year.In Europe, a decade of extraordinarily low interest rates is coming to an end. The European Central Bank is winding down the money-printing program known as quantitative easing and could begin raising its benchmark interest rate — currently zero — next year.
That would have two impacts on the stock market. For one, companies — some of which have been able to issue bonds paying little or no interest — would have to pay more to borrow in the future, which could cut into profits.That would have two impacts on the stock market. For one, companies — some of which have been able to issue bonds paying little or no interest — would have to pay more to borrow in the future, which could cut into profits.
At the same time, higher interest rates are making bonds more attractive as an investment, prompting investors to shift some of their money out of stocks. The yields on 10-year bonds, which move inversely to prices, fell across Europe on Tuesday, indicating increased appetite for the investments. At the same time, higher interest rates are making bonds more attractive as an investment, prompting investors to shift some of their money out of stocks.
“Gradually the realization is dawning that the era when monetary policy provided unlimited support to markets is coming to an end,” Michael Heise, chief economist of German insurance giant Allianz, said in a note to clients Tuesday.“Gradually the realization is dawning that the era when monetary policy provided unlimited support to markets is coming to an end,” Michael Heise, chief economist of German insurance giant Allianz, said in a note to clients Tuesday.
An improving economic outlook has also meant European unions are demanding relatively hefty pay increases after years in which they settled for stagnant wages in return for job security. The IG Metall union in Germany, which represents workers at big companies like Daimler and Siemens, negotiated a new contract early Tuesday that provides for an effective annual pay increase of more than 3 percent through early 2019.An improving economic outlook has also meant European unions are demanding relatively hefty pay increases after years in which they settled for stagnant wages in return for job security. The IG Metall union in Germany, which represents workers at big companies like Daimler and Siemens, negotiated a new contract early Tuesday that provides for an effective annual pay increase of more than 3 percent through early 2019.
The contract applies only to workers in the state of Baden-Württemberg, in southwest Germany, but it will serve as a model for agreements in other German states.The contract applies only to workers in the state of Baden-Württemberg, in southwest Germany, but it will serve as a model for agreements in other German states.
Christian Hille, a senior fund manager at Deutsche Asset Management in Frankfurt, said that much of the selling was by investors compelled to move out of stocks for technical reasons — for example, because they manage a fund that has an obligation to limit losses to 2 or 3 percent.Christian Hille, a senior fund manager at Deutsche Asset Management in Frankfurt, said that much of the selling was by investors compelled to move out of stocks for technical reasons — for example, because they manage a fund that has an obligation to limit losses to 2 or 3 percent.
“We think that the movement is a bit overdone,” said Mr. Hille. He predicted that stock markets would eventually settle down because of the strong global economy.“We think that the movement is a bit overdone,” said Mr. Hille. He predicted that stock markets would eventually settle down because of the strong global economy.
“We are seeing a synchronized global upswing, which will be supported by U.S. tax stimulus,” he said. “We expect higher corporate profits.”“We are seeing a synchronized global upswing, which will be supported by U.S. tax stimulus,” he said. “We expect higher corporate profits.”
Analysts digesting the numbers from Asia said they did not expect the selling to let up anytime soon.Analysts digesting the numbers from Asia said they did not expect the selling to let up anytime soon.
“This is the beginning of a more meaningful setback in a market that was, at least from the nonfinancial sectors, very overvalued and there was a lot of euphoria,” said Jonathan Garner, an Asia and emerging markets equity strategist at Morgan Stanley.“This is the beginning of a more meaningful setback in a market that was, at least from the nonfinancial sectors, very overvalued and there was a lot of euphoria,” said Jonathan Garner, an Asia and emerging markets equity strategist at Morgan Stanley.
“I don’t think this is a ‘one-day’ that finishes today,” he added.“I don’t think this is a ‘one-day’ that finishes today,” he added.
Investors seem mostly to have been spooked by concerns about the potential for rising inflation in the United States. Still, the share run-up of recent months has been global, and experts said a number of markets elsewhere were also due for a readjustment.
In China, in particular, markets were overheated after a steep rise since the start of this year, said David Cui, China equity strategist at Bank of America Merrill Lynch.
“Given how bullish the market has been positioning, there could be a reasonable period of adjustment,” Mr. Cui said, referring to Chinese stocks.
“It’s not going to be a two-day phenomenon,” he added. “If you take a few-months view, there is a chance this is the start of a decent correction.”