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Global equities reel from $4 trillion correction

By Patrick Higgins  |  06/02/2018 16:19
Just days after they reached record highs, global stock markets continue to reel as the second straight day of mass sell-offs continues. The worldwide sell-off began yesterday, with massive drops in value for a variety of US equities.  This soon spread to bourses across Europe and Asia, which had also been experiencing record highs in value.  Globally, over $4 trillion of stock value has been wiped out.
After 400 days without drops exceeding -5% in stock value, Wall Street’s penchant in particular for short-volatility investment is experiencing an abrupt halt.  The S&P 500 and the Dow Jones are predicted to open -1.2% and -1.8% lower respectively, on top of respective declines of -4.1% and -4.6% yesterday.  The Dow, in particular, shed 1,175 points on Monday, its steepest ever single-day decline in points.
Relatedly and quite interestingly, the VIX volatility index, otherwise known as Wall Street’s “fear gauge,” breached 50 today, indicating the level of investor fear is at its highest since the financial crisis of 2008.  Additionally, the FTSE 100 in Europe and the Nikkei 225 in Japan declined by -1.9% and -4.7% yesterday respectively.  Both stock markets continue to trade in the red today.
What is driving such massive sell-offs?
There are a number of reasons for the sudden and substantial fall in stock prices.  However, the most prominent factors appear to be a sudden spike higher in inflation expectations and investors short-selling due to faster-than-expected rises in interest rates worldwide.  Additionally, there are concerns that the US economy could potentially overheat from excessively rapid economic growth within the next few years, which would prompt the Fed to raise interest rates even faster than currently anticipated.  In such a case, risky global assets would be untenable for a multitude of investors, thus prompting the current fear cycle.  In the event of an overheating US economy, the current stock market concerns would indeed be brought full circle.
All eyes on Washington
It is difficult to determine where the bottom in all of this is.  Despite the sell-off in equities, the global economy continues to perform satisfactorily.  This is particularly true in the US, despite the fears of overheating.  US economic data released by the Department of Labour on Friday indicated that wages rose by 2.9% in 2017, the largest increase since 2009, with unemployment continuing to be low at 4.1%.  The Fed has already indicated that it seeks to raise US interest rates three times this year, however, one would be advised to pay close attention to any Fed briefings on this issue.  One such briefing, albeit of a lower level, is being conducted by James Bullard, President of the Federal Reserve Bank of St. Louis, this Friday.  The briefing will concern US monetary policy going forward.  However, juxtaposed with the developments in Washington, and with new Fed Chairman Jerome Powell being just one day officially into the job, the definite direction of the Fed regarding the frequency of interest rate raises is still somewhat up in the air.

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