Wall Street turmoil deepens as investors rush to bonds

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Wall Street’s turmoil deepened on Thursday, sending the biggest US equity benchmark tumbling back into negative territory for the year and investors flooding to the safety of US Treasuries.

The S&P 500 slid as much as 2.4 per cent in midday trading in New York, touching a low for the day of 2,616 points. It recovered slightly by early afternoon to a loss of 1.8 per cent, while the Dow Jones Industrial Average was 2.1 per cent lower.

The US Treasury market started the day under pressure, with the 10-year yield flirting with the 2.9 per cent mark. But turbulent equity markets encouraged investors back into US government debt, pushing the yield back to 2.84 per cent.

European stocks were hit hard by waves of selling in the final hour of trading. The Eurofirst 300 index ended the day down 1.2 per cent, taking its loss this week to 3.1 per cent – on track for its worst weekly performance since December 2016.

Ireland’s benchmark Iseq overall index followed suit and ended lower by 1.58 per cent.

With markets enduring their first significant blow since the start of 2016, analysts are scrambling to explain the severity of the rout – with much of the blame falling on algorithmic trading strategies and complex exchange-traded notes – and to reassure investors that the storm will pass.

“Corrections like this can be shortlived but painful since both the start and the end are difficult to call in the absence of clear triggers,” said Pierre Blanchet, head of multi-asset strategy at HSBC.

“However, we do not believe anything has fundamentally changed or that the correction represents a shift to a new market paradigm.”

Stormy weather
However, many analysts and investors expect the stormy weather to last for a few more days, given how hard equities had rallied through 2017 and because of ongoing technical factors such as automatic trading by volatility-tied strategies.

Marko Kolanovic, a senior strategist at JPMorgan, estimated that volatility-targeting algorithmic traders will sell about $200 billion (€163 billion) of equities this week, leading to more pressures on markets.

“The collision of selling from various systematic strategies and diminished equity liquidity provided by electronic market making in times of stress will produce liquidity crises,” he wrote in a note to clients on Thursday.

But he pointed out that the economic backdrop was far more favourable than the last time markets suffered a volatility-induced swoon in the summer of 2015, and highlighted robust global growth, strong corporate earnings and stable commodity prices.

“All of these factors make a big difference, and should give confidence to fundamental investors to step in,” Mr Kolanovic said.

Celia Dallas, chief investment strategist at Cambridge Associates, warned of “continued pressure”, but argued that corporate share buybacks could “provide a countervailing force” once they exit their earnings season blackout periods.

– Copyright The Financial Times Limited 2018

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