Markets start the week in freefall
Global equities, bond prices and commodities tumble as investors flee on US and China worries
GLOBAL equities, bond prices and commodities tumbled yesterday, entering another week of heavy selling as investors fled markets on worries about the US central bank's plans to scale back its bond buying, combined with tighter financial conditions in China.
Prices of US Treasuries resumed their slide, and benchmark yields climbed to a nearly two-year high. The S&P 500 fell more than 2pc, erasing all of its quarterly gains as Wall Street joined a global selloff after concerns about a liquidity crunch in China sent Shanghai stocks down more than 5pc.
The shift out of assets that have benefited most from cheap money has been sharpest in the US debt market, where yields on 10-year Treasury notes spiked to two-year highs of 2.6pc yesterday. The 10-year note yield has risen a full percentage point in a little more than a month.
"The exit door is not that big and everyone's going at the same time," said Justin Lederer, strategist at Cantor Fitzgerald in New York. "This is not just about a Treasury backup, this is a global, everyone-getting-out-of-everything."
The broad selloff added to more than $1trn (€750bn) in losses in global equity markets in the five days ended June 21, based on the market value of the MSCI World Index.
The US stock market alone lost about $354.4bn (€270bn) during the five-day period, while the US bond market erased about $390.8bn, measured by the market value of the BofA/Merrill Lynch Broad Market Index.
The declines stem from the Federal Reserve's signal last week that the era of cheap central bank money – which caused many assets to hit record highs – was coming to an end. But they have been exacerbated by China's battle to transition to a lower-growth economy.
Both events are unprecedented and have driven a sharp rise in risk aversion by investors fearing a long period of volatility across markets.
"The hardest hit is no doubt the bond market. The decline that we have seen in the past four weeks in the bond market would be equivalent to a 30-35pc decline in the stock market, considering bonds are traditionally not volatile," said James Dailey, senior portfolio manager at Team Asset Strategy Fund in Harrisburg, Pennsylvania.
US stocks extended their losses yesterday, adding to the S&P 500 index's biggest weekly decline in two months as investors repriced shares in the wake of the Federal Reserve's plans to withdraw its stimulus.
Investor sentiment also was hurt by a cash crunch in China, which could further slow Chinese growth. Markets in Shanghai and Hong Kong posted their biggest daily losses in almost four years.
The Dow Jones industrial average was down 223.22 points, or 1.51pc, at 14,576.18. The Standard & Poor's 500 Index, SPX, was down 30.29 points, or 1.9pc, at 1,562.14. The Nasdaq Composite Index was down 57.77 points, or 1.72pc, at 3,299.48.
As investors retreated into the dollar, share markets tumbled, with the falls heaviest in many of the world's major emerging markets.
The Euro STOXX 50 Volatility index, known as the VSTOXX, jumped to a nine-month high, signalling a sharp rise in risk aversion among investors.
European equity markets weakened despite data showing German business morale picking up for a second straight month in June, pointing to a slow recovery for Europe's largest economy.