US Stocks Suffer Worst Fall in 6 Years | Markets Volatility

2/16/2018 US stocks suffer worst fall in 6 years
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FT reporters FEBRUARY 6, 2018
US stocks suffered their worst fall in more than six years on Monday, erasing gains for the year and
punishing investors who had bet on an extended period of market calm.
The broad-based equities retreat started last week as interest rates headed higher amid concerns of
returning inflation. That sell-off turned into a rout on Monday afternoon as stocks tumbled and
investors returned to bonds as a safe haven. The slide continued into Asian trading on Tuesday.
The pace of the afternoon equity sell-off in New York raised suspicions that investors had been
forced to unwind positions in haste. At one point, the Dow Jones Industrial Average shed more
than 800 points in 10 minutes, taking the measure down as much as 1,600 points. Trading volume
was the second highest this decade.
“The speed of this is like a flash crash at the end of the trading day,” said Jim Paulsen, strategist at
Leuthold Investment Management. “Either there are quantitative trades that are automatic or
someone got caught awfully wrong.”
By the day’s end, the S&P 500 index was off 4.1 per cent at 2,648.94 — its worst percentage fall
since August 2011, when the US lost its triple-A credit rating. All but two of the stocks in the index
closed in the red. The Dow finished 1,175 points lower, down 4.6 per cent, and the Nasdaq fell 3.8
per cent to 6,967.
Asia benchmark indices were down sharply on Tuesday afternoon. Japan’s benchmark Topix fell
6.3 per cent — the biggest drop in 19 months — with losses across the board, while South Korea’s
Kospi Composite shed 2.6 per cent. Australia’s S&P/ASX 200 was down 3.7 per cent with banks off
3.5 per cent. S&P 500 futures were down 2.8 per cent.
Sovereign bonds in the region found favour as appetite for equities evaporated, while the yield on
10-year US Treasuries was down almost 2 basis points at 2.65 per cent in Asian trading. The yield
on 10-year Australian government bonds sank 16 bps to 2.772 per cent while that on the equivalent
Japanese sovereign bonds was down 1bp at 0.059 per cent.
The Vix volatility index, known as Wall Street’s fear
gauge, on Monday hit 37.32, its highest level since the
Chinese currency devaluation of August 2015. ThatThese big declines are just
minor corrections in the
Markets Volatility
US stocks suffer worst fall in 6 years
Dow’s 1,175-point loss wipes out gains for year and sends shudders through global markets

2/16/2018 US stocks suffer worst fall in 6 years
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exceeded the levels reached during the Greek debt
crisis of 2015 and after the 2016 Brexit referendum.
Exchange-traded products that bet on markets
remaining calm suffered large losses on Monday. The
ProShares Short Vix, an exchange traded fund, lost
32 per cent. The VelocityShares short-Vix exchange-
traded note, issued by Credit Suisse, lost 14.3 per
cent. In after-hours trading, the two products were
both down more than 80 per cent from their closing
prices.
“I still think this is a continued reaction to the very rapid rise in interest rates and inflation
expectations over a short period of time. That has the market spooked and continues to be the
driver,” said Michael Arone, chief investment strategist at State Street Global Advisors. “We are
just seeing some continued selling after a very long period of a complacent environment.”
Bond markets found a measure of support on Monday, with the US 10-year yield down 14 basis
points to 2.71 per cent. The benchmark had reached a high of 2.88 per cent earlier in the day. It
started the year at 2.43 per cent.
In a press briefing on Air Force One for a presidential trip to Ohio, Donald Trump’s principal
deputy press secretary, Raj Shah, was asked if the falling equity markets would have long-term
effects on the president’s economic agenda. He said: “Look, markets do fluctuate in the short term,
I think we all know that. But the fundamentals of this economy are very strong.”
scope of things . . . There is a
lot of cash on the side to buy
on the break, and what
comes next will be most
important
Ray Dalio, co-chief investment officer at
Bridgewater Associates

2/16/2018 US stocks suffer worst fall in 6 years
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Early in the day, Ray Dalio, co-chief investment officer at Bridgewater Associates, said in a blog
post on LinkedIn that “this is classic late-cycle behaviour,” adding: “These big declines are just
minor corrections in the scope of things . . . There is a lot of cash on the side to buy on the break,
and what comes next will be most important.”
Bond markets have come under increasing pressure this year as economic sentiment has improved
and central banks have started to unwind some of their post-crisis monetary stimulus. A surge in
US wages revealed in data on Friday and robust economic growth have raised the possibility that
the Federal Reserve could look to tighten monetary policy this year more aggressively than
anticipated.
US Treasury prices also have been hit by expectations that the US deficit will rise because of the
recent tax cuts, leading to more government borrowing. This concern has hit the stock market.
Rising bond yields can undercut equities by lifting borrowing costs for companies and making
returns from stocks look relatively less attractive.