An abrupt Wall Street sell-off has sent panic through global equity markets, dragging down European and Asian stocks on Thursday, as investors reassessed valuations in the face of US-China trade war fears and rising interest rates.
Technology shares led the sell-off in the US as the S&P 500 tumbled 3.29%, its steepest one-day fall since February. Asian shares fell heavily overnight, with Shanghai Composite Index falling 5.22%.
The pan-European Euro Stoxx 600 Index was down more than 1.9% in morning trading on Thursday.
Helal Miah, investment research analyst at stockbroker the Share Centre said the sell-off had been coming for some time. “The question that some investors will be asking is one of whether we will see a quick bounce back like we saw at the start of the year,” he said.
“This time round it may be different; previously the sell-off and bounce back had been led by the FANGS and tech companies. With increasing questions about these companies’ valuations and all the other overhanging worries in the global economy, it may be a while until we see those all-time highs again.”
Rate rise fears
Adrian Lowcock, head of personal investing, at fund broker Willis Owen said stock markets have had a delayed reaction to last week’s comments from the US Federal Reserve Chairman Jerome Powell that the US was a long way from neutral on interest rates and indicated more rate rises were on their way. “The effects of his comments sparked a sell off in the bond markets last week and that has finally reached equity markets,” he said.
“Markets fear that the Federal Reserve will raise interest rates faster and higher than initially anticipated which raises concerns they are behind the curve. This scenario usually ends up triggering a recession in the US which would be felt on a global scale.
“However, we are not there yet and the effect on equity markets so far has not been too significant. The Fed Chair’s comments have led to a reassessment of the situation and changes in investor sentiment which has resulted in a sell-off. Given segments of global stock markets such as the Technology sector have been trading on high valuations, some profit taking and correction are inevitable.
Miah added that a stock market sell-off was always going to be most likely as a result of the rising interest rate environment, especially in the US.
“We had the much-expected hike in September from the US Federal Reserve now taking interest rates to 2.25% with the expectation that the policy makers will keep in their path of steady rate hikes as the US economy strengthened.
“But with unemployment recently hitting 3.7%, and as signs slack in the economy and with the labour market disappearing, there is the expectation that prices and inflation could start running ahead of the Fed’s expectations. As a result, the policymakers may now think about increasing rates at a faster pace than anticipated,” he said.
Negative news critical mass
Witold Bahrke, senior macro strategist at Nordea Asset Management said markets have reached a critical mass on negative news, which has triggered the sell-off.
“Bond yields spiking adding to monetary headwinds, global growth indicators (PMIs) falling and lastly political risk rising in the shape of the ongoing trade war, as well as Italy, are keeping investors awake at night. Each single issue is not new, but adding it all up you get a toxic cocktail for markets,” he said.