Global markets in uncharted waters as US stocks show cracks

A trader on the floor of the New York Stock Exchange on Aug 20, 2015, in New York City.
A trader on the floor of the New York Stock Exchange on Aug 20, 2015, in New York City.PHOTO: AFP

SYDNEY (BLOOMBERG) - Currency and equity markets from Hong Kong to Johannesburg and Istanbul were already faltering. Then US stocks joined in.

The stresses that have been building in global markets roared ashore in America on Thursday (Aug 19) as the Standard & Poor's 500 Index tumbled the most in 18 months and helped send the MSCI All-Country World Index to the lowest since January.

Until now, the S&P 500 had traded in a narrow range even as China's slowdown, Greece's debt crisis and a plunge in emerging-market currencies roiled other markets. The Chicago Board Options Exchange Volatility Index soared 49 per cent this week with one trading day remaining.

"As of a couple of days ago, the S&P 500 had held up. Now it's back in negative territory for the year. I'd suggest there's still probably more downside in the U.S.," said Mark Lister, head of private wealth research at Craigs Investment Partners Ltd. in Wellington, New Zealand, which manages about US$7.2 billion. "We've been expecting a correction and it looks like we're getting one."

 

Losses earlier in the week in US shares were limited as the rout in emerging-market assets deepened, with developing- nation equities sinking to the lowest level since 2009 and currencies from Malaysia to Kazakhstan tumbling. That changed Thursday as the S&P 500 closed below its average level of the past 200 days, wiping out gains for 2015 as investors sought the safety of gold and Treasuries.

"Unless you are the staunchest contrarian, then these are times to be very cautious," Chris Weston, Melbourne-based chief market strategist at IG Ltd., wrote in a note to clients. "US markets have held up well of late, being viewed as somewhat of a safe haven. This view seems to have deteriorated somewhat with the S&P 500 closing below its multi-month trading range."

While declines of this magnitude are more common in Asian and European stock markets, the S&P 500 has gone more than three years without a drop of more than 10 per cent, the longest stretch since 2004.

What's important "is whether current weakness is just a correction or the start of a new bear market," said Shane Oliver, the Sydney-based global strategist at AMP Capital Investors Ltd., which manages about US$119 billion. "Periodic sharp falls in the range of 5 per cent to even 20 per cent are quite normal and healthy in that they help the market let off steam and the rising trend resume."

The MSCI Asia-Pacific Index fell 1.8 per cent as of 10:27 a.m. in Tokyo on Friday, headed for its lowest close since February 2014. Japan's Topix index sank 2.3 per cent, poised for its worst weekly loss since October. South Korea's Kospi index dropped as much as 3 per cent. Hong Kong's Hang Seng Index is on the cusp of a bear market, while futures on the FTSE China A50 Index slid 1 per cent.

"It's not pretty," said Lister. "The whole world's looking a little bit sad at the moment. China still looks really worrying on a number of fronts."