Stock Selloff Goes Global

If you want to understand what happened overnight in the wake of Tuesday’s selloff in the US, all you need to do is glance at the clustering on this chart…

(Goldman)

…or perhaps have a look at this table…

(Goldman)

…or maybe take a minute to digest this…

(Goldman)

Taken together, those three visuals convey the following message: drawdowns happen more often than you think they do, and over time, regional equity markets have become increasingly correlated which makes it difficult to find diversification (i.e. a place to hide) when we get days like Tuesday.

With that in mind it should come as no surprise that global stocks fell overnight, taking their cues from Wall Street.

The Nikkei was hit hard, as Japanese equities were weighed down by reports of a failed North Korean missile test and a yen that’s sitting near a fourth month high as haven demand spikes.

“Investors are recalibrating expectations to reflect the reality that U.S. President Donald Trump’s pro-growth agenda won’t happen overnight,” said Jonathan Ravelas, chief market strategist at BDO Unibank. With Asian markets having rallied, traders “needed a good reason to take profit, and here it is,” Margaret Yang, an analyst at CMC Markets in Singapore, told Bloomberg by e-mail.

Yes, “here it is.” “Here’s” proof that Trump’s agenda is going to take an eternity to implement (imagine that) and suddenly, everyone is waking up to the fact that while we’re all waiting on tax reform and fiscal stimulus, we’re going to be subject to near daily insanity from a man who is quite clearly unhinged. In short: great expectations are being dialed back fast. “We are seeing a correction followed by unwinding of those expectations,” the above-mentioned Yang adds. Here’s a summary of analyst chatter re: Asian markets:

IG ASIA (Jingyi Pan)

Pressure from overnight markets likely affecting sentiment in Asia
Investors may be more than willing to take profit now given the fact that many Asian indices reached record highs
Concerns of a prolonged unwinding of the Trump trade may be brewing
Sharp drop in oil prices overnight after the API report may be playing a part as well as it should weigh on energy stocks in the region

SBI SECURITIES (Hideyuki Suzuki)

Japanese stocks being negatively impacted by the stronger yen and anxiety over Trump’s policies
Market has started wanting to see proof that guarantees the feasibility of Trump’s policies
Will need “something more promising” for markets to regain confidence to mitigate the anxiety

PT SINARMAS SEKURITAS (Jeffrosenberg Tan)

“Euphoria has run high” and markets need to see the results
Today may be starting point for investors paring back their optimism, but will need to see further losses to confirm that theory

MIRABAUD (Andrew Clarke)

Stock decline isn’t a prelude to a prolonged correction, but a “breather”
Investors will look at taking profits as end of first quarter approaches, amid a lack of major catalysts to encourage buyers into the market
“I get the impression clients want to buy, and are waiting for the right level, whatever that level may be.”

BDO UNIBANK (Jonathan Ravelas)

Investors are recalibrating expectations to reflect the reality that Trump’s pro-growth agenda won’t happen overnight
Asian equity markets have rallied recently, which allows for a technical correction

CMC MARKETS (Margaret Yang)

Recent rally in risk assets was based on the assumption that Trump can bring positive changes to the U.S. economy, although nothing has been implemented yet
“We are seeing a correction followed by unwinding of those expectations.”
Retreat in stocks is healthy because too much optimism has been priced in and markets have gone “too high and too far”
“Markets do need a good reason to take profit, and here it is.”

And this could very well get worse before it gets better. “Markets are ‘highly focused’ on Thursday’s vote on the healthcare bill as failure to repeal Obamacare could raise questions about Trump’s overall fiscal reforms, potentially sparking further risk aversion,” Bloomberg notes, quoting Koichi Takamatsu, head of G-10 FX trading for Japan at Nomura Securities. Here’s SocGen’s take:

A reverse in US equity indices has proven contagious to all regions and all markets. Asian equities are down across the board, industrial metals prices too, are weaker while oil prices are trapped for now in a new lower range. Bond yields are lower and in FX land, that can only mean one thing — a stronger yen. USD/JPY isn’t, in fact, much lower but it touched its lowest level of the year overnight and if we close today below 111.50 the next plausible support line is 110, the 50% retracement of the move from the Nov 9 low to the Dec 15 high. The only way that doesn’t happen, is if the current downtrend in US Treasury yields stops — sharpish. I noted on Monday that last week had seen a very rapid halving of the net short in 10yr Note futures, but the risk, clearly, is that clearing out half the positions wasn’t enough. The US has only got existing home sales and house price data to look forward to today, so it will be equity market sentiment which dictates how much further the bond rally goes.

Right.

In Europe everything’s lower and it’s the same story. “European stocks fell, mirroring global losses, as investors questioned the extent to which U.S. President Donald Trump can deliver on growth policies that have been priced in since his election,” Bloomberg wrote, paraphrasing what they said earlier this morning with regard to Asian markets.

Predictably, gold’s sitting at a three-week high.

And crude is slumping following Tuesday’s API report which showed a larger than expected build. “Fifty is a major psychological level [for Brent], and a break opens the way for an extension to even lower levels,” Ole Hansen, head of commodity strategy at Saxo Bank said, adding that “the EIA report needs to surprise like it did last week in order to halt this slide.”

Here’s a snapshot across equity markets:

Nikkei down 2.1% to 19,041.38
Topix down 2.1% to 1,530.20
Hang Seng Index down 1.1% to 24,320.41
Shanghai Composite down 0.5% to 3,245.22
Sensex down 0.7% to 29,275.30
Australia S&P/ASX 200 down 1.6% to 5,684.51
Kospi down 0.5% to 2,168.30
FTSE 7309.68 -68.66 -0.93%
DAX 11880.85 -81.28 -0.68%
CAC 4967.61 -34.82 -0.70%
IBEX 35 10155.70 -56.20 -0.55%

Meanwhile, we did hear from a number of Fed speakers on Tuesday evening. Here’s a quick summary which you can interpret as you see fit:

Mester

Federal Reserve Bank of Cleveland President Loretta Mester said she doesn’t yet see businesses in her district following through on higher levels of confidence with more investment and spending.
Companies in Mester’s region are reporting a “change in tone” and more optimism
As yet, “there isn’t strong evidence that firms, at least in my district, are responding to that,” she said
Mester spoke with reporters following a speech in Richmond, Virginia
Mester said there is no threshold above or below the Fed’s 2 percent inflation target, defining its “symmetric” nature
Inflation is on track to continue moving toward 2 percent goal
Public should focus on underlying inflation trend and not month-to-month variations, she said
Mester said she has built “a bit more than three” rate increases into her forecast for 2017

Rosengren

Federal Reserve Bank of Boston President Eric Rosengren reiterates his concerns about the U.S. commercial real estate sector, noting that commercial and multifamily holdings have climbed even as supervisors warn about high valuations.
“We must acknowledge that the commercial real estate sector has the potential to amplify whatever problems may emerge when we at some point face an economic downturn,” Rosengren says in text of remarks prepared for delivery in Bali, Indonesia
“Commercial real estate capitalization rates are very low by historical standards,” Rosengren says
Notes that low rates, aging population might encourage investors to reach for yield
Says banking system is better prepared to withstand a shock than before the global financial crisis, but “we should not feel overconfident, thinking that strengthening the resilience of global banks is, by itself, sufficient”

Kaplan

Dallas Federal Reserve Bank President Robert Kaplan says Fed is “moving toward a period where we should begin allowing the balance sheet to gradually and patiently run off,” Reuters reports, citing interview late Tuesday.
“But I think we have work to do, probably, to get to that point”
Says “country will be well-served” by the central bank’s rate increase last week
- “Now that we’ve done it, I think that we’ve got the benefit of a little time here to see how the economy unfolds”
- “I plan to take advantage of that to assess how the economy is unfolding and be prepared to make a judgment as we head toward the next meetings”
“We are still accommodative and I think it’s very appropriate for us to be accommodative”

Finally, here’s the econ docket for the US on Wednesday: