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U.S. equities enter correction territory as fears increase

Insights2018-02-06

U.S. stocks plunged Monday, extending a steep sell-off from the previous session, amid increasing concerns that rising inflation will force interest rates higher. The Dow Jones Industrial Average plummet nearly 1,600 points briefly in late trading, marking the worst intraday fall in market history. The index settled 1,175.21 points or 4.60 percent lower while the S&P 500 slumped 4.10 percent on Monday, both erasing 2018's gains. Volatility roared back into American equity markets. The Cboe Volatility Index, Wall Street's fear gauge, spiked 115.60 percent to 37.32, a rise that the market has not seen in years. As market analysts have pointed out, Monday's slide was not caused by anything fundamental. Instead, the investors' move to lock in profits and possibly some computer-programmed trading, combined with concerns about interest rates, have sent the equities into correction territory. "U.S. equities have performed remarkably well since March 2009. While dramatic in the short term, today's price action is a healthy correction which is overdue," said Brendan Ahern, chief investment officer of the U.S. Krane Funds Advisors. He said that investors are rebalancing their portfolios from U.S. equities to more reasonably valued equity markets like China, Europe and emerging markets. Peter Costa, president of Empire Executions, Inc., said while the slide looks terrifying, the market has been waiting for some kind of correction for some time, and Monday's pullback was "perfectly fine." Like Costa, Wall Street traders said they generally are not seeing any panic. Bloomberg News conducted a survey of 10 sell-side and buy-side traders and money managers, which showed no specific economic or fundamental data point or news as the driver of the late-session plunge in the stock market. Some traders cited quantitative algorithms and sell programs, according to Bloomberg. Monday's sell-off followed that of the previous session, during which the Dow slumped over 650 points. On Friday, investors worried that the Federal Reserve may hike rates on a faster pace after an upbeat jobs report. U.S. total nonfarm payroll employment increased by 200,000 in January, beating market consensus, and the unemployment rate stayed unchanged at 4.1 percent, the Labor Department reported Friday. Average hourly earnings posted a 0.3 percent gain for the month and an annualized gain of 2.9 percent. The data sent interest rates higher. The 10-year Treasury yield jumped to as high as 2.85 percent, a four-year high, putting pressure on the stocks. The 30-year yield rose to its highest level since March. Rising bond yields are traditionally seen as bad for stocks as it means large companies will have to spend more to finance their debts as interest rates increase. The market then was thinking about the possibility of the Fed's raising interest rates four times this year, after the central bank in December suggested three more increases in 2018. On Monday, however, traders on the market of the Fed funds futures indicated a less than 50 percent chance that the central bank will move three times this year. The market saw a 69 percent of chance that the Federal Open Market Committee will move at its next meeting in March, according to the CME's FedWatch tool. The probability was well above 90 percent just days ago. The prospects for raising rates in June, September and December all dipped compared to several days ago. Looking ahead, market analysts are still cautiously optimistic about the U.S. equities. "With U.S. Treasury yields rising, it has made U.S. equities less attractive to certain types of investors. The shift from stocks to bonds should stabilize within a day or two," said Ahern. Costa said that he did not think the sell-off would change the trajectory of the stocks market of the year. "There is nothing serious to worry about. The fundamentals of the economies of the United States, West Europe and China are all there and all good... Tax cut is not going away," said Costa. (ASIA PACIFIC DAILY)

U.S. stocks plunged Monday, extending a steep sell-off from the previous session, amid increasing concerns that rising inflation will force interest rates higher.

The Dow Jones Industrial Average plummet nearly 1,600 points briefly in late trading, marking the worst intraday fall in market history. The index settled 1,175.21 points or 4.60 percent lower while the S&P 500 slumped 4.10 percent on Monday, both erasing 2018's gains.

Volatility roared back into American equity markets. The Cboe Volatility Index, Wall Street's fear gauge, spiked 115.60 percent to 37.32, a rise that the market has not seen in years.

As market analysts have pointed out, Monday's slide was not caused by anything fundamental. Instead, the investors' move to lock in profits and possibly some computer-programmed trading, combined with concerns about interest rates, have sent the equities into correction territory.

"U.S. equities have performed remarkably well since March 2009. While dramatic in the short term, today's price action is a healthy correction which is overdue," said Brendan Ahern, chief investment officer of the U.S. Krane Funds Advisors.

He said that investors are rebalancing their portfolios from U.S. equities to more reasonably valued equity markets like China, Europe and emerging markets.

Peter Costa, president of Empire Executions, Inc., said while the slide looks terrifying, the market has been waiting for some kind of correction for some time, and Monday's pullback was "perfectly fine."

Like Costa, Wall Street traders said they generally are not seeing any panic.

Bloomberg News conducted a survey of 10 sell-side and buy-side traders and money managers, which showed no specific economic or fundamental data point or news as the driver of the late-session plunge in the stock market. Some traders cited quantitative algorithms and sell programs, according to Bloomberg.

Monday's sell-off followed that of the previous session, during which the Dow slumped over 650 points.

On Friday, investors worried that the Federal Reserve may hike rates on a faster pace after an upbeat jobs report.

U.S. total nonfarm payroll employment increased by 200,000 in January, beating market consensus, and the unemployment rate stayed unchanged at 4.1 percent, the Labor Department reported Friday.

Average hourly earnings posted a 0.3 percent gain for the month and an annualized gain of 2.9 percent.

The data sent interest rates higher. The 10-year Treasury yield jumped to as high as 2.85 percent, a four-year high, putting pressure on the stocks. The 30-year yield rose to its highest level since March.

Rising bond yields are traditionally seen as bad for stocks as it means large companies will have to spend more to finance their debts as interest rates increase.

The market then was thinking about the possibility of the Fed's raising interest rates four times this year, after the central bank in December suggested three more increases in 2018.

On Monday, however, traders on the market of the Fed funds futures indicated a less than 50 percent chance that the central bank will move three times this year.

The market saw a 69 percent of chance that the Federal Open Market Committee will move at its next meeting in March, according to the CME's FedWatch tool. The probability was well above 90 percent just days ago.

The prospects for raising rates in June, September and December all dipped compared to several days ago.

Looking ahead, market analysts are still cautiously optimistic about the U.S. equities.

"With U.S. Treasury yields rising, it has made U.S. equities less attractive to certain types of investors. The shift from stocks to bonds should stabilize within a day or two," said Ahern.

Costa said that he did not think the sell-off would change the trajectory of the stocks market of the year.

"There is nothing serious to worry about. The fundamentals of the economies of the United States, West Europe and China are all there and all good... Tax cut is not going away," said Costa.

(ASIA PACIFIC DAILY)

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