Saturday 23 September 2017

Stock market rout but tech gains turn Wall Street positive

Japanese bonds fell below zero for the first time

Share traders dressed in a carnival costumes work a their desks ar the stock exchange on Shrove Tuesday in Frankfurt, Germany February 9, 2016. Frankfurt's bourse traders follow a long tradition by wearing carnival costumes on Shrove Tuesday. REUTERS/Kai Pfaffenbach
Share traders dressed in a carnival costumes work a their desks ar the stock exchange on Shrove Tuesday in Frankfurt, Germany February 9, 2016. Frankfurt's bourse traders follow a long tradition by wearing carnival costumes on Shrove Tuesday. REUTERS/Kai Pfaffenbach
Asia Stocks

Ailish O'Hora and John Mulligan

Wall Street opened lower on Tuesday, led by financial stocks, as investors remained cautious and chose safer assets on mounting concerns of a prolonged slowdown in global economic growth.

In early trade, the Dow Jones industrial average .DJI was down while the S&P 500 and Nasdaq also recorded falls.

But Wall Street eked out small gains in early trading on Tuesday, easing off a lower opening, as a drop in energy and financial stocks was offset by a rebound in the technology sector.

Six of the 10 major S&P sectors were lower, led by a 0.9 percent rise in the technology sector .SPLRCT.

German economic fears also growing
German economic fears also growing

Facebook (FB.O) and Alphabet (GOOGL.O) were both up about 2 percent. Microsoft (MSFT.O) was up 1.2 percent. The stocks, all of which fell heavily in the past two days, were giving the biggest boost to the S&P and the Nasdaq.

U.S. stocks have taken a beating for the better part of this year on increasing concerns of a sustained slowdown in global economic growth and falling oil prices.

Global markets were also lower on Tuesday, again led by a fall in European bank stocks.

"The general thematic continues to be the European banking situation that has unhinged the risk market and slowly crept into the credit markets," said Chad Morganlander, portfolio manager at Stifel, Nicolaus & Co in Florham Park, New Jersey.

A trader watches his screens in Hong Kong. As the property market worsens, more and more investors are turning to the the derivatives market for protection.
A trader watches his screens in Hong Kong. As the property market worsens, more and more investors are turning to the the derivatives market for protection.

Earlier, stock markets tumbled  across the globe this morning on growing fears that negative interest rate policies by Central Banks will cause more problems for the already shaky global economy.

Seven years after introducing quantitative easing to stave off world economic depression and the recent move by the Bank of Japan to shift to negative interest rates, investors are questioning Central Bank policy tools - the European Central Bank went negative in 2014.

"The markets are wondering, well, we’ve had these non-conventional monetary policy experiments for the last six or seven years and they haven’t caused a sustainable boost to global growth, so what will the latest moves do,” according to Shane Oliver, head of investment strategy at Sydney-based AMP Capital Investors Ltd. “It’s a reasonable question to ask given the events of the last few weeks.”

Irish key share index has continued to fall this morning as part of a wider sell-off of stocks around Europe and the rest of the world.

three-day graph for forward Brent contracts - Source: Bloomberg
three-day graph for forward Brent contracts - Source: Bloomberg

The ISEQ Overall Index was off 1.8pc in early afternoon trade today.

Shares in Bank of Ireland, which have been pounded over the past few sessions, were lower again this morning, shedding about 2pc. They’re trading at just 25 cent each, having slumped about 25pc since the start of the year.

That’s part of a large-scale sell-off in European banking stocks.

The huge declines in financial stocks does not bode well for plans by the current government to sell a 25pc stake in State-owned AIB later this year.

The Standard & Poor’s 500 Index fell to a 22-month low yesterday, and the Iseq index of shares dropped over 5pc and while today Japan's benchmark index fell to levels not seen since 2014 and Greek banks tumbled.

European stocks also fell on Tuesday, extending sharp losses from the previous session, as concerns persisted over the health of the region's top banks given signs of a global economic slowdown.

The pan-European FTSEurofirst 300 index, which had fallen 3.4 percent in the previous session, lost more ground to decline by 0.3 percent in early session trading.

Falling stocks on Germany’s Dax exchange today. Photo: AFP/Getty Images
Falling stocks on Germany’s Dax exchange today. Photo: AFP/Getty Images

The European banking index - which had slumped 5.6 percent on Monday - fell back by another 1.1 percent.

Goldman Sachs analysts wrote that while there were no signs of any strain in terms of euro or U.S. dollar funding in money markets for European banks, market liquidity had nevertheless reduced.

Meanwhile, Asian share markets were scorched as stability concerns put a torch to European bank stocks and sent investors stampeding to only the safest of safe-haven assets.

A woman looks at an electronic stock board at a securities firm in Tokyo (AP)
A woman looks at an electronic stock board at a securities firm in Tokyo (AP)

As fear overwhelmed greed, yields on longer-term Japanese bonds fell below zero for the first time, the yen surged to a 15-month peak and gold reached its most precious since June.

Japanese Finance Minister Taro Aso felt moved enough to warn the yen's rise was "rough", something of an understatement as the Nikkei nosedived 5.4pc.

MSCI's broadest index of Asia-Pacific shares outside Japan fell 1.2pc, with Australian shares hitting 2-1/2-year closing low, and would have been lower if not for holidays in many centres.

Spread-betters see another weak session in European shares, where German DAX .GDAX is seen falling 0.7pc and Britain's FTSE 0.5pc.

S&P 500 e-mini futures ESc1 fell more than 1pc at one point.

"Sentiment towards risk assets remained extremely bearish and price action reflected a market that may be capitulating," said Jo Masters, a senior economist at ANZ.

All of which magnified the stakes for U.S. Federal Reserve Chair Janet Yellen's testimony this week.

"She needs to come across as optimistic without being too hawkish and cautious without being negative," said Masters. "Hawkishness or dovishness could easily exacerbate the current sell-off, tightening financial conditions further."

Wall Street pared losses but still ended deep in the red. The Dow lost 1.1pc, while the S&P 500 fell 1.42pc and the Nasdaq 1.82pc.

The rout began in Europe on Monday, when the FTSEurofirst 300 index shed 3.4pc to its lowest since late 2013, led by a near 6pc dive in the banking sector.

Deutsche Bank alone sank 9.5pc as concerns mounted about its ability to maintain bond payments. Late Monday, the German bank said it has "sufficient" reserves to make due payments this year on AT1 securities.

The cost of insuring bank debt against default also climbed to its highest since late 2013. Borrowing costs in Spain, Portugal and Italy jumped as investors demanded a fatter risk premium over safer German paper, where two-year yields hit record lows at minus 52 basis points.

FEAR FACTOR

"The 'fear factor' in markets has morphed from being about an emerging market hard-landing and collapsing oil prices to being about the extent of the slowdown in the developed world and the ability of central banks to reflate asset values yet again," analysts at Citi said in a note.

The Bank of Japan's recent shift to negative rates has fuelled concerns that ever-more exotic monetary policy is rapidly reaching the point of diminishing returns.

Yet murmurings about the risk of recession in the United Sates has also led investors to wager the Federal Reserve will have to slow, or suspend altogether, plans to normalise rates.

Futures markets have priced out any chance of a hike in March and imply a funds rate of just 0.43pc by December. The current effective funds rate is 0.38pc.

That has pulled down 10-year Treasury yields to their lowest since early 2015 at 1.69pc and undermined bullish bets on the U.S. dollar.

It touched a six-week trough on the Swiss franc, while the euro edged up to $1.1217. Against a basket of currencies, the dollar eased 0.1pc to 96.485.

By the far the biggest mover was the yen, long considered a safe haven given Japan's position as the world's top creditor nation.

The dollar dived as far as to 114.205 yen, having been above 121 just a week ago, while the euro fell as much as 1pc to 128.31 yen.

The yield on Japan's benchmark 10-year government bond turned negative for the first time as the Nikkei stock index tumbled.

The 10-year JGB yield touched minus 0.010pc. It was the first time a G7 nation's 10-year government bond yield has turned negative, although yields on German bunds have come relatively close.

With more and more sovereign bonds paying negative rates, the relative cost of holding gold has seemed less and less of a burden. The metal reached its strongest since June at $1,200.60 an ounce, and last traded at $1,193.60.

Oil prices bounced slightly after three sessions of losses. Brent futures LCOc1 added 11 cents to $32.99 a barrel, while U.S. crude CLc1 rose 34 cents at $30.03.

(Additional reporting Reuters)

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