By Joseph Ciolli & Oliver Renick / Bloomberg
THE turbulence spreading through financial markets gathered momentum, as the weakest Chinese manufacturing data since the financial crisis heightened concerns over slowing global growth.
Volatility surged as Standard & Poor’s (S&P) 500 Index headed toward the worst week in three years while Europe entered a correction, and stocks from Hong Kong to Indonesia tumbled into bear markets. Junk bond yields rose to the highest since October 2012, and US Treasuries were poised for the largest weekly gain in five months. Oil sank below $40 a barrel for the first time since 2009, and was set for its longest losing streak since 1986.
More than $3.3 trillion has been erased from the value of global equities after China’s decision to devalue its currency spurred a wave of selling across emerging markets, as investors speculate a deepening economic slowdown will have a ripple effect throughout the world.
“For much of this year, the glass was considered half full and now people the last 48 hours are thinking it’s looking more empty,” George Hashbarger, who oversees $224 million as CEO and portfolio manager in Knoxville, Tennessee-based Quintium Advisors Llc., said by phone. “This is more like October than it is buy-the-dip.”
The S&P 500 dropped 2.4 percent at 2:55 p.m. in New York, falling below 2,000 for the first time since February. With yesterday’s plunge, the index’s two-day loss is the most since 2011. The S&P 500 is down more than 5 percent from a record for the first time this year, after sinking below a trading range that has supported it for most of the year.
Fab five
Investors are selling the biggest winners of 2015. Companies that have come to be known as the Fab Five—Netflix Inc., Facebook Inc., Amazon.com Inc., Google Inc. and Apple Inc.—have seen $97 billion in market value erased over two days. Losses have pushed the Nasdaq 100 Index down 5.9 percent, the biggest two-day decline in four years.
Before this week, US equities had held their ground throughout 2015, weathering turmoil from Greece and headwinds, including a strong dollar that threatened multinationals’ earnings and a more than 60-percent drop in oil prices.
Trading range
The S&P 500 had stayed within a range roughly tracking its 50-, 100- and 200-day moving averages, boosted by signs the economy is recovering and support from central banks. The benchmark index hadn’t had a decline of more than 5 percent all year, and still hasn’t dropped more than 10 percent since 2011.
The selloff “simply means that all areas of the market are in gear now, and, unfortunately it’s on the downside,” Bruce Bittles, chief investment strategist at Milwaukee-based Robert W. Baird & Co., which oversees $110 billion, said in an interview on Bloomberg Television’s Market Makers with Cory Johnson and Olivia Sterns. “Investors have to be much more careful now with that technical development.”
The week’s retreat from the riskiest assets picked up speed as data showing a gauge of China manufacturing at the lowest level in more than six years highlighted the challenges facing the nation’s economy.
The MSCI All-Country World Index tumbled 2.2 percent to the lowest since October. The MSCI Emerging Markets Index slid 2.2 percent, with the Malaysian ringgit and South Korean won leading currencies lower. Investors have sought safety in the yen, which strengthened for a third day against the dollar.
“This week’s selloff started from the yuan’s devaluation, which generated speculation about the true state of China’s economy,” Hertta Alava, who helps oversee the equivalent of $395 million as the head of emerging markets at FIM Asset Management Ltd. in Helsinki, said by e-mail. “China’s PMI was weak, so it is just adding fuel to this negativity.”
Hong Kong’s Hang Seng Index dropped 1.3 percent, taking declines since an April high beyond 20 percent. The Shanghai Composite Index slumped 4.3 percent, bringing the week’s loss to more than 10 percent and coming within one point of erasing all gains since the government began efforts to prop up the market in July.
“The whole world’s looking a little bit sad,” said Mark Lister, head of private wealth research at Craigs Investment Partners Ltd. in Wellington, which manages about $7.2 billion. “China still looks really worrying on a number of fronts.”
Europe correction
The Stoxx Europe 600 Index lost 3.3 percent, as the selloff engulfed all western European markets and industries in the benchmark gauge. The index had its worst weekly loss since 2011, down 6.5 percent. It is down 13 percent from an April high, entering a correction.
While concern grew about the global recovery, data today showed the euro-area economy picked up momentum this month, with an improvement in Germany lifting a business index.
Trading patterns show the declines are poised to slow. The 14-day relative strength index on the MSCI All-Country World Index closed below 30 on Thursday, a level that signals an asset is poised to rebound, according to some technical analysts.
Amid the selloff, the S&P 500 is trading at 17.7 times earnings. That’s down from 18.9 times a month ago, which was near a five-year high, though still exceeds the five-year historical average of 16.1 times profit.
US Treasuries are poised for their biggest weekly gain in five months as demand for fixed income soared. Ten-year notes also drew support from signs the Federal Reserve will keep interest rates close to zero for longer, and from a decline in oil prices that helped push a gauge of inflation expectations toward its lowest since 2010.
Sovereign debt
Government debt from Australia to Britain also gained this week, driving the average yield on developed-nation bonds to a three-month low.
Yields on junk bonds rose to an average 7.39 percent, the highest since October 2012, according to Bank of America Merrill Lynch bond indexes. The premium investors demand to hold junk bonds over investment-grade debt climbed to the most since December, the indexes show.
Oil briefly plunged below $40 a barrel in New York for the first time in more than six years on signs the supply glut will be prolonged. The US pumped crude in July at the fastest pace for the month since at least 1920, the American Petroleum Institute reported on Thursday. Prices have decreased 5 percent this week, an eighth weekly loss.
Copper is poised to extend its longest run of weekly declines since January, with aluminum, lead, nickel and zinc also dropping.
Image credits: AP