Market buzz: Wall Street regains its nerve
After two days of blood-letting that sparked a global stock market selloff and worries that more was to come, Wall Street held its nerve on Tuesday after an initial lurch lower and ended the session in the green.
2215: The Dow finished the day 567.02 points or 2.33% higher at 24,912.77, while the S&P 500 gained 46.2 points or 1.74% to 2,695.14 and the Nasdaq composite added 148.36 points or 2.13% to close at 7,115.88.
Putting things into perspective: Dow gained 567 points today after Monday's 1175 point drop, bottom line: -608 points. pic.twitter.com/gdE65nnzQI— Holger Zschaepitz (@Schuldensuehner) February 6, 2018
2020: Stocks are moving higher in the final hour of trading, with the Dow Industrials clawing back 427.69 points to trade at 24,773.94. In parallel, the VIX is down 24.09% to 28.33.
2001: "What we see this year is the continuation of a trend but with a pretty big hump on the way," Carmignac's Didier Saint-Georges told Citywire. The fund manager drew a parallel between 2018 and 1987 to explain how he saw the markets. "And so rising rates didn't prevent equity markets from going up except that somehow, around October, it reached a point where equity markets discovered that when you raise rates at one point. [...] You have to adjust your discount rate when you calculate your cash flows and suddenly valuations became scary and you had an equity correction." On a related note, (although history is by no means necessarily a guide to anything) on Monday other market participants made a similar comparison, further pointing out how after the October 87 crash markets continued rising into 1989.
William D Cohan, former JPMorgan and Merrill investment banker, wrote on CBNC of his memories of one-day collapse of 22.6% on Black Monday 1987: "That was a genuine panic, as I saw myself, with grown men huddled around their Quotron machines – desktop real-time quotes were still years away – with tears streaming down their faces as they contemplated the extreme loss of wealth they were experiencing...But even that one-day financial disaster turned out to be a blip in retrospect. The better choice that day – as it will probably be this time around, too – is to stay invested in the stock markets – to not panic and sell... If you [have faith], then these kinds of corrections inevitably result in a buying opportunity."
1645: On a bullish note, in remarks to Bloomberg TV Cannacord Genuity's chief market strategist, Tony Dwyer, says "as long as the fundamentals remain in place, you want to buy it." As an aside, the Russell 2000 is now atop its 200-day moving average (the S&P 500 is still several percentage points above its own), which is widely considered as the technical threshold separating a 'bear' and 'bull' market. Meanwhile, the VIX continues to see whipsaw trading conditions and is now up 9.99% to 41.05.
1618: By way of a possible guidepost, the consensus year-end 2018 forecast for the yield on the benchmark 10-year US Treasury note is 2.9%.
1615: Buy the dip? "The ongoing correction in global equities was overdue. The pretext and triggers are less important. Extended valuations often find their own triggers. But worries about a 1994-style rise in interest rates derailing global risk appetite look overblown to us. Both the macro and policy environments are vastly different. Given strong earnings (EPS) cycles and no evident liquidity stresses, we look to buy more into the correction. Japan, EM Asia and the even US are on our radar," says Oxford Economics.
1454: Wall Street's self-proclaimed 'fear gauge', the Chicago Board of Options Exchange's VIX index, has turned sharply lower, dropping 35.21% to 24.18, helping equities recoup a tad of their losses from the prior session, with the Dow Industrials now adding 1.08% to 24,599.33.
1437: Lessons from the past, by Morgan Stanley: "While large one-day S&P drawdowns have historically been associated with higher-than-usual returns for equities and tighter spreads for credit in the subsequent 12 months, weakness tends to persist 3-6 months out. Two key takeaways are that 1) risk assets can remain soft in the short term, and 2) realised volatility in months subsequent to sell-off episodes trends higher than usual, even as implied volatility drops off after initial spikes."
1430: The Dow Jones Industrials has started the session 2.14% or 498.19 points lower at 23,861.99, putting it more than 10% down from its 26 January all-time highs, alongside a fall of 1.98% for the S&P 500 to 2,594.15 and a retreat of 1.99% to 6,830.20 for the Nasdaq Composite.
1420: Stagecoach shares are one of the biggest fallers in the FTSE 350 today. The train and bus operator has skidded lower after the UK transport minister said on Monday that the government could take over the company’s running of the rail route between London and Edinburgh after it got its numbers wrong when bidding to run the franchise.
1350: The significant spike in risk, as seen by the surging VIX index and futures overnight, "was technical in nature and does not necessarily indicate a true increase in risk perception", Barclays' equity strategists are suggesting on Tuesday.
The VIX shot up to almost 38 overnight and opened higher in Europe as well now trading above 43. BlackRock warned of the risk of so-called inverse exchange-traded products following Monday’s steep decline in financial instruments that bet on calm markets, some of these which were down more than 80%.
US-focused RBC Capital Markets analysts said they were "buying the dip", seeing "more positives than negatives for US equities", with deals and cash deployment via buybacks, M&A, debt paydown and capex spending seeming likely to ramp up this year, earnings revision trends remaining strong and as economic recession risks "remain low".
1319: Emmanuel Cau at JP Morgan says: "Global equities did not experience any material weakness for nearly two years, valuations have become stretched and technical, positioning and sentiment indicators all flashed red in recent weeks.
"The unwinding of this extreme bullishness could have a bit more to go in the near term, but our view is that the medium term fundamental backdrop remains supportive and that one should indeed use the recent dip as buying opportunity."
1309: Analysts at Goldman Sachs are pointing out to clients that the systematic bid for volatility should subside but "pressure on equities can continue". Automatic flows, including selling from volatility-control funds (a strategy with a 12% volatility target, 30% bond portfolio, and a variable amount of US equities would be selling equity futures totaling 15% of its AUM as a result of the sell-off) and CTAs (commodity trading advisors) "may pressure equities in the coming days, though these flows can be offset by corporate buybacks and fundamental investors".
1258: S&P 500 futures are dipping by 6.25 points to 2,601.50 and those for the Dow Jones Industrials by 191 points to 23,747.00. However, earlier in the session futures on the Dow fell as low as 23,088, although at one point they had clambered atop 24,225.
In parallel, the Chicago Board of Options Exchange's volatility index (VIX) is tacking on a further 31.86% to 49.21, possibly as rattled traders continue to seek out protection against the risk of another leg lower in stocks.
1220: The midday report shows London stocks still firmly in the red, with the FTSE 100 down 2.1% to 7,181.09, still sharply lower but up 102 points from its weakest point of the day, while the pound was down 0.1% against the dollar at 1.3941 and 0.4% weaker versus the euro at 1.1243.
Jane Foley, a senior FX strategist at Rabobank, says: "It is glaringly obvious from the tumbles in stock markets that the market is currently re-evaluating the risk of inflation and the outlook for financing costs. If inflation were to raise its ugly head in the US, this would clearly have ramifications for Fed policy and the value of the USD. That said, there is plenty of evidence that many investors in other assets classes are holding their nerve reasonably well."
With major indices now down more than 10% from their recent highs, equity markets are in correction mode.
1145: The FTSE is down around 2% at 7,170 and many investors are eyeing the chance of 'buying the dip'. Analysts point out that the Footsie is trading at less than 14 times earnings on a forward 12-month p/e basis, while S&P is below 16x and the Stoxx 600 below 15x.
Neil Wilson at ETX Capital said algorithm-based funds were part of the problem in a selloff that is being driven in part a technical correction. "Algos are battering the key levels forcing the market lower each time. This is fuelling the selloff and creates a powerful downdraft that catches buyers the wrong side every time... So far every time dip buyers come in they are being blown away – despite the fact that on a forward earnings basis stocks are looking more and more appealing."
With major indices looking 'cheap' on a forward earnings basis, Wilson said this might help bigger buyers come in to shore things up when they feel the time is right. "On a forward earnings basis, equities haven’t looked this cheap in half a decade – the big guys might just be tempted but then again there could be a little further for this to go and they may decide to wait another day or two before hoovering up bargains. In many ways we’re seeing the same kind of situation as after the Brexit vote – a significant correction without any fundamental (ex-UK) reason for the selloff, presenting buyers with a boat-load of opportunities."
1010: Chris Beauchamp, chief market analyst at IG, said: "A host of indicators, including market breadth, are at the kind of levels that signal short-term bottoms, suggesting that a bounce from here is entirely within the bounds of possibility, even if it is then followed by fresh declines." He said that for those investors with a longer-term horizon, the chance to pick up some stocks at cheaper prices might seem too good to pass up.
"The relative calm seen in gold prices also points to the idea that this isn’t some kind of major risk-on/risk-off move as we were used to years ago. The speed of the correction, not its size, is the real shock, particularly to a market inured to low volatility. A crystal ball would be handy at this point, but in the absence of such a device it is possible that equities will resume their climb higher in due course, although not perhaps in the same quiet fashion."
London stocks dived in early trade on Tuesday, taking their cue from a bloodbath on Wall Street and in Asia as investors fret that rising inflation will force the Fed to hike rates more than initially expected this year.
0901: European stock indices joined in the global bout of stock market rout following the violent correction overnight on Wall Street. The pan-European Stoxx 600 index was down 2.15% to 373.8 after roughly an hour of trading, while the DAX was 2% lower at 12,430.57 as it recovered from initial losses of more than 3%. The CAC 40 in Paris was down 1.9% at 5,185.17, the FTSE MIB in Milan lost 1.7% to 22445.51.
In a typical flight-to-safety move, the yield on the benchmark 10-year German bund fell by four basis points to 0.70%.
0841: The FTSE 100 is down 2.2% to 7,176.56 after almost three quarters of an hour of trading on Tuesday, with the pound flat against the dollar at 1.3964 and down 0.4% versus the euro at 1.1248. See our London open report for more.
Overnight, the Dow lost 4.6% or 1,175 points to 24,345.75, having fallen nearly 1,600 points intraday, while the S&P 500 ended down 4.1% at 2,648.94. The S&P and the Dow suffered their biggest declines since August 2011, while in Asia, it was a similar picture, with the Nikkei and Hang Seng both down more than 4.5%.
US stocks had enjoyed record highs recently as investors welcomed President Donald Trump’s tax overhaul, but a strong non-farm payrolls report last Friday, which showed the best US wage growth in eight-and-a-half years, prompted fears that the Fed may need to hike rates more than previously anticipated.