US stocks whipsawed in early trading on Tuesday, as volatility on global markets intensified, breaking an extended period of calm for investors.
The S&P 500 experienced a roller-coaster ride during the first hour of trading. After falling as much as 2.1 per cent to 2,593 in the first minutes of trading, the index went on to erase all of its losses and rally 1.3 per cent to 2,682. Those gains evaporated within the hour, with the benchmark index down just under 1 per cent as investors stared down the close of the European trading day.
The Vix volatility index, known as Wall Street’s fear gauge, briefly dipped below 30 from a peak of 50 before the opening of the US market. The rapid rise in Vix from 14 on Friday heightened the pressure on sellers of financial instruments that provide a hedge against rising volatility.
The initial lurch lower and recovery early on Tuesday came a day after the US market suffered its biggest percentage fall since August 2011. The losses were triggered by investors’ concern that an era of cheap money is drawing to a close in the face of renewed inflationary pressures.
“I still think this is a continued reaction to the very rapid rise in interest rates and inflation expectations over a short period of time,” said Michael Arone, chief investment strategist at State Street Global Advisors. “We are just seeing some continued selling after a very long period of a complacent environment.”
The volatile trading in US stocks on Tuesday followed steep losses in Asia that spread to Europe. The Nikkei 225 finished down 4.7 per cent and in Hong Kong, the Hang Seng index dropped 5.5 per cent.
In late afternoon activity, the FTSE 100 was trading 1.9 per cent and the Xetra Dax 30 had lost 1.8 per cent, with financial stocks continuing to take the biggest toll.
Torsten Slok, chief international economist at Deutsche Bank, said: “Markets are coming to the conclusion that the US economy is close to overheating and therefore that the risks of inflation are bigger than the risks of a recession.
“Higher inflation risk means higher short and long rates. With valuations stretched in both equities and credit, risky assets are more vulnerable to higher interest rates than before. The allocation of money from risky assets to risk-free assets is going to be bumpy.”
The equity volatility in turn spread to the $14tn US Treasury market, which is often seen as a haven in market routs. The yield on the 10-year US Treasury, which moves inversely to prices, climbed 8 basis points to 2.78 per cent. Earlier in the day it had been down as much as 6 basis points to 2.65 per cent. At its height on Monday, the 10-year yield reached 2.8850 per cent, a level last touched in January 2014.
Mark Haefele, global chief investment officer at UBS Wealth Management, said: “While the speed of the market declines over the past week is jarring, market declines of this overall magnitude are not uncommon.
“In our view, risks of the Federal Reserve raising interest rates too quickly and triggering a US recession over the next two years appear very low.”
| Rank | Date | Drop at low | Close (pts) | % at close |
|---|---|---|---|---|
| 1 | May 6 2010 | -8.59% | 1,128.15 | -3.24% |
| 2 | Aug 8 2011 | -6.68% | 1,119.46 | -6.66% |
| 3 | Aug 24 2015 | -5.27% | 1,893.21 | -3.94% |
| 4 | Aug 18 2011 | -5.27% | 682.55 | -4.46% |
| 5 | Mar 5 2009 | -4.90% | 1,200.07 | -4.25% |
| 6 | Aug 4 2011 | -4.82% | 1,120.07 | -4.78% |
| 7 | Aug 10 2011 | -4.65% | 1,120.76 | -4.42% |
| 8 | Sep 22 2011 | -4.50% | 1,129.56 | -3.19% |
| 9 | Feb 5 2018 | -4.49% | 2,648.8 | -4.10% |
| 10 | Mar 30 2009 | -4.43% | 787.53 | -3.48% |
| Since 1975 | ||||
| Source: Thomson Reuters | ||||
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