Business

Stock Markets Sink, Suggesting Global Rout Will Last

Posted February 6, 2018 9:43 a.m. EST

A stock market rout in the United States took on global contours Tuesday, as investors from Tokyo to Hong Kong and London to Frankfurt sent shares tumbling.

The sharp falls 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 Donald Trump has touted seemingly unending stock market highs as proof of improved economic prospects.

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.

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.

While 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. Pence, who was speaking to reporters as he headed to Asia, said that the U.S. economy remained strong, pointing in particular to record-low unemployment and signs of accelerating wage growth.

Traders, however, appeared to be preparing for another day of declines.

— Futures markets, which track how stocks will perform before trading opens, indicated shares in major New York markets were likely to dip Tuesday.

— 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.

— 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.

— 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.

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.

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.

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.

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 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.”

On Tuesday morning in Europe, futures that track U.S. stock market indexes fell slightly, and 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.

“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,” 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.”