Wednesday saw the largest single-day drop for the Nasdaq in 7 years as plunging US tech stocks caused a global market swoon. European and Chinese markets have looked weak for some time now, but the US had been a pillar of strength and was not far from record highs before yesterday’s plunge. With the bulk of the selling coming after the European close, this morning has seen some pretty ugly gaps lower with the FTSE100 falling more than 120 points and threatening to break below the psychological 7000 mark for the first time since April. The Pound is drifting lower and paring recent gains a little after comments from the Irish foreign minister, Simon Coveney, poured some cold water on hopes of an imminent Brexit deal by declaring it far too soon to make these claims.
Stock markets vulnerable to further declines
The scale of Wednesday’s declines have made many observers sit up and take notice with heavy losses seen around the globe. Given that there was no real fresh news to cause the large drops, it seems to be more a case of the US finally waking up to several sizable threats to what is the longest bull market in history. The political situation in Italy has been weighing on European bourses for the past couple of weeks, while Chinese equities remain in a bear market after investors sold out on rising trade concerns, but the US has carried on seemingly unperturbed until yesterday’s plunge. The rise in US yields is starting to worry investors across the Atlantic, but these actually declined yesterday so can’t be blamed squarely for the selling.
Volatility index spike far smaller than February
The large drops in equities seen in early February were attributed to an explosion higher in the volatility index as leveraged shorts were forced to cover, but while there was a large move to the upside for the VIX yesterday, it was still well short of the spike seen earlier this year. To be fair this was in keeping with the nature of the declines for stocks, with the selling pretty measured and constant; a far cry from the precipitous drops in short bursts seen back in February. In some ways this could be seen to bode worse for the markets going forward as the declines don’t appear to be a knee-jerk reaction to a short-term event. Rather they seem to be the markets eventually realising that there are many reasons why the current lofty valuations aren’t justified.
Trump takes aim at the Fed
Predictably President Trump wasted little time in offering his view on the market drop, placing the blame squarely at the door of the Federal Reserve. Trump claimed the central bank had “gone crazy” by continuing to raise rates and while dismissing the fall as a correction that “we’ve been waiting for for a long time.” It is true that the Fed funds rate is far higher than many of its peers, but this is due to the underlying strength of the economy and inflationary pressures that have been boosted by Trump’s own policies. In criticising the bank’s decisions, Trump is the first President in decades to weigh in on monetary policy and with the bank still seen by markets as having a 3 in 4 chance of raising in December, there could well be more pressure to come from the President going forward.
