Mike van Dulken of Accendo Markets says the sell-off is being driven by a ‘perfect storm’.
A strong 2017 rally extending into January, low volatility, low interest rates, over-optimism and complacency, over-leverage and financial engineering, all coming to a head as investors react to the possibility of higher/faster interest rates rises with bond yields creeping higher to jeopardise the current market situation.
Why are markets falling?
It’s always hard to explain exactly why the financial markets are behaving in a certain way. But many City experts are attributing the sell-off to fears that central banks will soon raise interest rates, ending the era of cheap money.
Last Friday, we learned that American workers have enjoyed the biggest jump in earnings since 2009. That’s great news – except it could force the US central bank to hike borrowing costs more aggressively. Investors are now factoring in four American interest rate hikes this year – up from three before.
It’s also worth noting that markets surged in 2017, thanks to optimism over the global economy. Donald Trump’s tax cuts gave shares another lift — because cutting corporation tax is good for profits.
But.. those same tax cuts could force America to borrow more money to cover its budget deficit. That would probably push down the value of US government debt, and push up the interest rate (or yield) on those bonds. Again, that could force the Federal Reserve to tighten monetary policy.
It could also make bonds a more attractive investment – another reason to ditch shares today.
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European stocks hit hard
European stocks have fallen to their lowest level since last August, as traders hit the sell button at bourses across the continent.
The Stoxx 600 index, which tracks Europe’s biggest companies, has fallen by 3.1% this morning. Germany is having a particularly bad morning, down over 3.5%.
The London stock market is still deep in the red, but might be bouncing off its opening slump.
FTSE 100 TUMBLES BY 255 points
Boom! Britain’s blue-chip index of top shares is tumbling at the start of trading, to its lowest level in a year.
The FTSE 100 fell by 255 points, or over 3.2%, to 7079 points, with every share losing ground. It’s not been that low since December 2016.
Investors are scrambling to sell shares following the tumbles on Wall Street last night, and Asia earlier today.
Jasper Lawler of London Capital Group tells us:
The stock market open in the UK and Europe looks about as bad as it can get. The bloodbath on Wall Street, which was repeated in Asia has seen confidence evaporate in Europe.
Hold onto your hats…. the European stock markets are about to open…
Bitcoin falls again
Cryptocurrencies are also being hammered hard this morning.
Bitcoin has tumbled by 12% this morning, taking the digital currency below $6,000 for the first time this year.
Hussein Sayed, Chief Market Strategist at FXTM, says:
The most famous digital currency has fallen 69% from December’s record high, and almost 56% from the start of the year. The slide comes after many banks in the U.S. and U.K. considered banning customers from buying cryptocurrencies using their credit cards.
It seems the war against the crypto-world is far from over, and how the situation involves from here remains unknown, but risks are certainly high.
Risk aversion is “high” in the City today as we head towards the start of trading., says Elsa Lignos of RBC Capital Markets.
She says RBS’s ‘risk aversion thermometer’ hit a 2.5 year high of 27 on Monday – the highest level since China stunned the markets by devaluing its currency in 2015.
That time it took six weeks to turn risk-seeking again.
Jamie McGeever of Reuters has a sobering fact — $4 trillion has been wiped off global markets in the last week. That figure could be somewhat higher by the end of the day….
Earlier today Japan’s Nikkei fell into ‘correction territory’, meaning it has shed more than 10% from its recent high.
The sharp losses on global stock markets in recent days may be a sign that the ‘Goldilocks’ era is over — replaced by some aggressive and hungry bears.
Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities., explains:
“Since last autumn, investors had been betting on the goldilocks economy – solid economic expansion, improving corporate earnings and stable inflation.
But the tide seems to have changed.”
Introduction: European markets facing heavy losses
Good morning from London.
Financial markets are in turmoil after America’s stocks suffered their biggest one-day slide in six years.
The Dow plunged by over 1,100 points on Monday, its worst points loss ever and the biggest one-day percentage decline since the Eurozone crisis of 2011.
This has sent shockwaves through the markets, as investors fear that the long bull market in shares and bonds may be ending.
Worries over rising inflation and the prospect of American interest rate rises sparked Monday’s sell off. Some traders warning that computer trading strategies has triggered a flash crash (at one stage the Dow was down by a vertiginous 1,500 points).
Already today, Asian markets have posted severe losses. Japan’s Nikkei has shed 4.7%, while Australia’s market shed 3.2%.
My colleague Claire Phipps has been live-blogging all the action in Asia’s markets here:
European markets open in under an hour, and traders are already expecting heavy losses.
City firm IG are calling Britain’s FTSE 100 down around 3%, with the French, German, Italian and Spanish markets also heading for very sharp falls.
Jingyi Pan of IG warns that the markets are febrile today:
“There would be few places to hide from the risk-off atmosphere that is expected to extend its stay in Asian markets today in a significant manner.
This is fear rolling over itself,”
Michael Hewson of CMC Markets says this correction has been a long time coming…
These declines have been a long time coming and in a sense have already started to become self-accelerating. At the end of last year margin debt levels on US stocks were at record highs, helping fuel the rise we’ve seen in the last few months.
The sell-off in the last few days is likely to reverse this trend, and potentially accelerate it further, particularly if investors start to unwind it over concerns that we could fall further, which seems likely if events in Asia this morning are any guide.
It’s a volatile situation out there – traders will be looking to see whether Wall Street can recover, or whether it suffers fresh losses.
We’ll be tracking all the action through the day….