Financial market research and analysis

Europe faces a sea of red following US bloodbath

US markets plummeted overnight as the sell off in the equity market gathered pace, less than two weeks after the US stock market hit a record high. The Dow closed 4.6% or 1,175 points lower, after having been as far as 1600 points lower at one point in the session. The Dow has lost over 8.5% in the last two sessions, effectively wiping out any gains made so far this year. The S&P 500 and the Nasdaq closed 4.1% lower and 3.8% lower respectively.

Market Structure failed

The speed and nature of the massive decline in the Dow Jones raise some serious market structure questions. When things got really ugly at around 2.40pm EST, there was just a total absense of buyers. Where were market makers? It looks like instead of bidding for stocks, HFT market makers either abandoned ship or joined the selling.

Shallow-dip buying mode over

The surge in volatility during this market decline is a mirror image to the low vol grind higher that proceeded it. It was precisely the shallow dip-buying mode that traders got used to that made this event possible. When there finally was a bigger correction, nobody had a plan to deal with it and were too concerned with locking the huge profits from the last 12months.

The sell off in global equities showed no signs of slowing in the Asian session, as equity indices in Tokyo and Sydney dumped. The Nikkei dived over 6% for its worst points fall since 1990. Europe looks set to follow suit, with futures across Europe pointing to multi percentage point losses on the open. The selloff was broad based in the US but given the heavy fall in base metals and oil prices, commodity stocks could lead the decline in London, in addition to financials, which took the biggest hit in Asia. With little in the way of high impacting economic data, market sentiment looks set to be the key player in today’s session.

Rising Interest rates to blame?

The sell off in US stocks over the past week has been attributed to the prospect of higher interest rates, however there was no particular catalyst to the sell off on Monday. When a rally early on Monday fizzled, following the 666 point sell off on Friday, confidence spilled out of the market, leading investors to book what profits they could.

There are two factors here which have collided producing a catastrophic sell off predominantly in the US; the worst selloff in 6 years. Firstly, concerns over the US economy overheating are increasing. Friday’s impressive jobs numbers fed into this concern. This would result in the Fed raising interest rates, potentially more quickly than initially anticipated, which could dampen economic growth.

VIX hits highest level in 2 years

Secondly, the market has been due a correction for some time. The past two years have been particularly calm in the market, which has been evident in the volatility index (VIX) also referred to as the fear index. Overnight the VIX hit 37.32, its highest level since the Chinese currency devaluation in August of 2015. To help put this into context, last night’s VIX level was higher than levels reached in the VIX during the Greek debt crisis and following Brexit in June 2016.

Safe Haven Yen Rises

As risk aversion ripples across markets, flows have increased into safe havens such as the Japanese Yen. The USD/JPY collapsed during the US session, however, the pair has managed to find support in the region of 109.00 in Asia. A continued sell off could see the bears target 108.5 / 108.