Saturday, 20 October, 2018

Dow Jones sinks again as bond yields rise and higher inflation feared

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Orlando Vargas | 10 February, 2018, 02:30

USA stocks posted sharp gains in another wild trading session on Tuesday, as indexes rebounded from the biggest one-day drops for the S&P 500 and the Dow in more than six years that stalled the market's record run. That bear market caused the S&P 500 to lose almost half its value before its pullback ended 2½ years later.

Meanwhile, the CBOE Volatility index, the closely followed "fear-index" measure of expected near-term stock market volatility jumped 20 points to 30.71, its highest since August 2015. Although lower than the two-and-a-half-year high of 50.30 points hit on Tuesday, it is still triple than what it was just a week ago.

"Even though the epicentre of the sell-off appeared to be developments in the USA, it is not surprising that South African equities have been hit hard too", said Oliver Jones, an economist at Capital Economics.

The S&P 500, the benchmark for many index funds, shed 100.66 points, or 3.8 percent, to 2,581. "Also, if we see some stabilizing in interest rates and bond yields in particular, that would seem to indicate what's going on there has settled down". Tokyo's Nikkei 225 lost 2.3 percent to 21,382.62 and Hong Kong's Hang Seng retreated 3.1 percent to 29,507.42. "The trigger has been the really fast rise in bond yields", said Evan Brown, director of asset allocation at UBS Asset Management. The surge in volatility on Monday, which sent the VIX spiking to multi-year highs in just hours, led to the implosion of products created to bet against volatility, exacerbating markets stresses in a rapid unwind.

The sharp selloff in recent days was kicked off by concerns over rising inflation and bond yields, sparked by Friday's January U.S.jobs report, with investors pointing to additional pressure from the violent unwind of trades linked to bets on volatility staying low.

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Numerous analysts have predicted that the volatility is set to continue over the next 12 months, as the US Federal Reserve continues to weigh the pros and cons of raising interest rates.

The Dow fell 1,032.89 points Thursday to 23,860.46, which is 10.4 percent below its record close of 26,616.71 set on January 26. The Nasdaq Composite closed at 7,051.98 for a loss of -63.90 points or -0.90%. On one respected valuation measure (Cape) the United States market has only been more expensive on two other ominous occasions - 1929 and 1999. At 9:32 a.m. ET (1432 GMT), the Dow was up 346.11 points, or 1.45%, at 24,206.57.

The percentage of individual investors expecting stock prices to drop is at a three-month high of 35 percent, according to weekly survey results released Thursday by the American Association of Individual Investors.

President Trump frequently has touted the rising stock market as a sign his economic policies are working. This week, as the investment website Motley Fool points out, factors that help explain the dramatic price drops include a widespread expectation among investors that the USA economy is heating up. Chipmaker Nvidia added $14.56, or 6.7 percent, to $232.08.

This compares to the blue-chip index closing yesterday at 1.5% while the Euro Stoxx 600 was down 1.6%.

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