October 11, 2018 / 2:05 PM / 8 months ago

Commentary: Plenty of pointers, but no clear trigger for market jolt

LONDON (Reuters) - Turbulence in global markets should come as little surprise given the myriad factors pointing to a correction. What is more surprising - and perhaps worrying - was that there was no obvious trigger for late Wednesday’s shock slide.

A trader working on the floor of the New York Stock Exchange (NYSE) is reflected on a monitor in Manhattan in New York, U.S., October 10, 2018. REUTERS/Brendan McDermid

No policy shift, game-changing corporate news, political curve ball, energy jolt, inflation surge or military threat hit the radar in the last 24 hours. And yet a sudden, steep and widespread selloff snowballed across nearly all world stock markets.

What it highlighted was the difficulty in timing major market turns and reversals.

Major equity markets crashes such as 1987, 2000-01 and 2007-08 are easy to explain away with hindsight and sweeping generalisations about deteriorating fundamentals or overcooked markets.

But none of those peaks and reversals had single obvious trigger points either - they were more down to a building narrative and a confluence of negative events.

As one portfolio manager put it on Thursday, global investors have been behaving all year as if they are persistently long momentum and short volatility, which can lead to pressure-cooker conditions.

It remains to be seen if Wednesday’s tumble is another major correction or even bear market in the making, but the reasons and conditions for further weakness have clearly been mounting.

What will, or perhaps should, unnerve investors is that markets are showing how suddenly they can tip over.

The S&P 500 tumbled more than 3 percent on Wednesday, the Nasdaq had its biggest fall since 2011, and the 4.8 pct fall in China means its stocks are nearly 30 pct down from their January peak.

It’s a sea of red across world markets on Thursday too.

(Graphic: reut.rs/2yuc2ZV)

(Graphic: reut.rs/2yvuPnn)

Graphic: reut.rs/2yzbzW2)


October does tend to be a month for major market wobbles but, that seasonal and historical quirk aside, why now? There have also been big reversals in August and September - so why not last Wednesday? Or any other day in the last few weeks?

A tightening Federal Reserve, rising dollar, escalating trade war, slowing China and fragile emerging markets are all good reasons to have been nervous for some time.

U.S. Treasury yields hit a seven-year high of 3.26 pct this week but have been rising for weeks. Wednesday’s selloff was already under way before U.S. president Donald Trump said the Fed had gone “crazy” in raising rates.

Higher U.S. interest rates and yields have been squeezing emerging markets for most of this year, so there’s nothing new there either. Ditto the dollar’s rise - and the widespread emerging market weakness, including currency collapses in Argentina and Turkey, had failed to infect developed markets.

The same goes for global trade wars. The United States has already slapped tariffs on $200 billion of Chinese imports and potentially $267 billion more. Beijing has let the yuan depreciate 10 pct since April, and this week eased lending conditions for domestic banks. Tensions are rising, but again, nothing obviously new there.

Granted, investor fears over Italy have deepened up as the standoff between Rome and Brussels over the government’s budget proposals becomes more entrenched. But this is nothing like 2011 or 2012, at least not yet.

Wall Street had been printing record highs for weeks, so investors were hardly blindsided this week by lofty price levels and worries over stretched valuations. In any case, U.S. Q3 earnings growth expectations are running at a punchy 21 pct.

Then again, the 2000-01 tech and 2007-08 Great Financial Crisis market blow-ups weren’t detonated by single, detectable events either. Conditions for a crash had been in place for months.

Perhaps former Citibank chief Chuck Prince inadvertently summed it up best in July 2007, just as the global credit crunch was starting to bite.

“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing,” he said.

A panel outside the Hong Kong Exchanges displays top active securities during morning trading in Hong Kong, China October 11, 2018. REUTERS/Bobby Yip

There’s often no specific reason why the plug is pulled on the party, and it may be futile trying to come up with one.

The opinions expressed here are those of the author, a columnist for Reuters.

 (By Jamie McGeever; editing by John Stonestreet)

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