SHANGHAI (REUTERS) - Share markets in Asia plunged on Thursday (Oct 11) after Wall Street's worst losses in eight months led to broader risk aversion, a rise in market volatility gauges and concerns over overvalued stock markets in an environment of rapidly rising dollar yields.
European stocks meanwhile slumped to a more than an 18-month low after markets opened. Losses in London, Paris and Milan were already climbing towards 2 per cent in early trade, although the sell-off wasn't quite as dramatic as in Asia.
MSCI's broadest index of Asian shares not including Japan ended down 3.6 per cent, having struck its lowest level since March 2017. China's main indexes slumped over 5 per cent.
It meant MSCI's 24-country emerging market index was having its worst day since early 2016, after Wall Street's swoon had given the 47-country world index equivalent its worst day since February.
"Equity markets are locked in a sharp sell-off, with concern around how far yields will rise, warnings from the IMF about financial stability risks and continued trade tension all driving uncertainty," summed up analysts at ANZ.
The sell-off, which came as the head of the International Monetary Fund, Christine Lagarde, said stock market valuations have been "extremely high", erased hundreds of billions of dollars of global wealth .
Japan's Nikkei ended down 3.9 per cent, its steepest daily drop since March. The broader Topix lost around US$207 billion in market value, falling 3.5 per cent.
Shanghai's drop was its most severe since February 2016 and left it at its lowest level since late 2014. Shares in Taiwan were even harder hit, losing 6.3 per cent. Seoul's Kospi index dropped 3.8 per cent.
Singapore's Straits Times closed down 2.7 per cent or 84 points at 3,047.3, on its sixth straight day of losses.
"I think what happened was that we were a maximum elevation of risk appetite and maximum valuation of (U.S.) large caps and tech, so when you have that situation you are always vulnerable," said UBP macro and FX strategist Koon Chow.
Sinking global shares have raised the stakes for US inflation figures due later on Thursday as a high outcome would only stoke speculation of more aggressive rate hikes from the Federal Reserve.
"We're all just watching the Fed. We're all watching the US economy, we're worrying about an inflation spike or a wages spike that will come through," said Rob Carnell, chief economist and head of research at ING in Singapore.
But he said that he expected the data to show inflation peaking rather than moving sharply higher, which "could restore a little bit of calm."
On Wall Street, the S&P500's sharpest one-day fall since February wiped out around US$850 billion of wealth as technology shares tumbled on fears of slowing demand.
The S&P 500 ended Wednesday with a loss of 3.29 per cent and the Nasdaq Composite 4.08 per cent, while the Dow shed 3.2 per cent.
The blood letting was bad enough to attract the attention of US President Donald Trump, who pointed an accusing finger at the Fed for raising interest rates.
"I really disagree with what the Fed is doing," Trump told reporters before a political rally in Pennsylvania. "I think the Fed has gone crazy."
It was hawkish commentary from Fed policymakers that triggered the sudden sell off in Treasuries last week and sent long-term yields to their highest in seven years.
The surge made stocks look less attractive compared to bonds while also threatening to curb economic activity and profits.
"The rise in Treasury yields has been the primary catalyst for the sell-off in equities, since higher yields suggest a lower present value of future dividend streams, assuming an unchanged economic outlook," said Steven Friedman, senior economist at BNP Paribas Asset Management.
"It is also possible that equity investors are growing concerned that the Federal Reserve's projected rate path will choke off the expansion."
YUAN A FLASHPOINT
The shift in yields is also sucking funds out of emerging markets, putting particular pressure on the Chinese yuan as Beijing fights a protracted trade battle with the United States.
On Thursday, the president of the World Bank said he is very concerned about trade tensions and warned of a "clear" global economic slowdown if tariff threats escalate.
China has suspended approvals for an overseas investment product in Shanghai and has asked license holders such as JPMorgan Asset Management and Aberdeen Standard Investments to be "low profile" in marketing it, as concerns rise in Beijing over possible outflow pressures.
China's central bank has been allowing the yuan to gradually decline, breaking the psychological 6.9000 barrier and leading speculators to push the US dollar up to 6.9377 at 0602 GMT.
The onshore yuan was trading at 6.9305 per dollar at 0606 GMT, 65 pips weaker than the onshore close of 6.9240 Wednesday.
China's move has forced other emerging market currencies to weaken to stay competitive, and drawn the ire of the United States which sees it as an unfair devaluation.
"The yuan has already weakened significantly, to offset the tariffs announced so far," said Alan Ruskin, Deutsche's global head of G10 FX strategy. "Further weakness could exacerbate concerns of a self-fulfilling flight of capital, and a loss of control."
There was also a danger for the US if Beijing had to intervene heavily to support the yuan as it could lead to China selling US Treasuries, he added.
The dollar was already losing ground to both the yen and the euro, as investors favoured currencies of countries that boasted large current account surpluses.
The euro was at US$1.1550, up from a low of US$1.1429 early in the week. The dollar lapsed to 112.17 yen, a telling retreat from last week's 114.54 peak.
That left the dollar at 95.263 against a basket of currencies.
In commodity markets, gold struggled to get any safety bid and edged down to US$1,192.77.
Oil prices skidded in line with US equity markets, even though energy traders worried about shrinking Iranian supply from US sanctions and kept an eye on Hurricane Michael, which closed some US Gulf of Mexico oil output. Brent crude fell 1.6 per cent to US$81.75 a barrel, while US crude dropped 1.5 per cent to US$72.07.