Inside Financial Markets

Stocks Take a Beating as Alarm Grows

The new year’s stock-market rout deepened Wednesday, dragging the Dow Jones Industrial Average down almost 10% from its highs of late last year and sending investors flocking to safety.

The Dow ended the day perilously close to what traders call correction territory, defined as a drop of 10% or more from a recent peak. The broader S&P 500 and Nasdaq Composite indexes are already in correction mode, having endured a swift and tumultuous descent in just two weeks.

The selloff continued early Thursday in Asia. The Shanghai Composite Index breached its lows from last summer’s crash, but recovered some of the losses and at lunchtime was down 1.2%. A strengthening yen, which hurts Japanese exporters, drove Japan’s Nikkei Stock Average down 3.7%.

Traders said stock declines Wednesday were fueled by fresh concerns that a U.S. economic expansion entering its seventh year is vulnerable to softening growth overseas, particularly in China and emerging economies, as well as increasing volatility in other financial markets including oil and other commodities. Brent crude oil, the European benchmark, traded below $30 a barrel for the first time in a decade.

Investors have begun to sell stocks broadly. Energy stocks tumbled, as did shares of economically sensitive U.S. firms ranging from auto makers to home builders to home-goods retailers. Technology stocks also bore the brunt of the exodus.

Investors scrambled to buy high-grade bonds, which are viewed as a haven from economic and financial unrest. Brewer Anheuser-Busch InBev NV on Wednesday sold $46 billion of bonds to fund its acquisition of rival SABMiller PLC, in the second-largest corporate debt sale on record after a 2013 sale by Verizon Communications Inc. There were more than $2 of orders for each dollar of bonds sold, a sign that investors are eager for securities issued by firms whose prospects are less sensitive to economic conditions

Demand for a $21 billion sale of 10-year U.S. Treasury bonds was the strongest since December 2014, the government said, and the yield of the U.S. benchmark bond slid to 2.07%, its lowest level since last fall. Yields decline when prices rise.

The moves underscore how nervous markets have grown in the first weeks of 2016 given an accelerating slide in commodity prices that is raising fears that the global economy is headed for a slowdown. The World Bank last week trimmed global growth expectations, and while few analysts now predict a U.S. recession, many are saying that investors should buckle up for a bumpy ride.

“Uncertainty over China has filtered into all asset markets,” said Brian Daingerfield, a currency strategist at RBS Securities.

The Dow industrials fell 364.81 points, or 2.2%, to 16151.41. The S&P 500 dropped 2.5% and the Nasdaq Composite declined 3.4%.

Some of the biggest gainers of 2015 fell. Inc., which contributed the most points to the S&P 500 last year, fell 5.8%. Shares of Google parent Alphabet fell 3.5% and Facebook shares lost 4%. The Nasdaq Biotechnology Index dropped 5.3% and is now down 17% so far this year.

“I think 2016 will be a more challenging year for global markets,” said Paul Markham,global equity portfolio manager at Newton Investment Management, an asset-management arm of BNY Mellon.

All S&P sectors have posted losses so far this year. The smallest decline is in the utilities sector, illustrating the level of nervousness among investors. Those stocks, which tend to pay out high dividends and are considered more defensive bets, have slipped 0.3% this year.

For the year to date, the Dow is down 7.3%, the S&P has fallen 7.5% and the Nasdaq lost 9.6%. Nymex crude has fallen 18% and Brent crude is down 19%.

“You look across the spectrum, and there’s been nowhere to really go and hide,” said Sahak Manuelian, managing director in equity trading at Wedbush Securities.

Home Depot Inc. shares declined 4.8%, leading the Dow Industrials lower. The retailer has rallied 17% over the past 12 months as investors bet that the housing sector, a core area of the U.S. economy, remained on relatively solid ground. Rival Lowe’s Cos. dropped 4.6% and Ford Motor Co. slipped 5.1%.

“The cheapest stocks are the ones that have the highest level of economic sensitivity,” said Thomas Digenan, head of U.S. equities at UBS Asset Management, pointing out auto stocks and energy stocks. “It makes them really attractive,” he added.

The Dow Jones Transportation Average dropped 3.7%, bringing its year-to-date loss to more than 10%. Many investors watch the transports for early signs on the health of the economy.

The dollar rose against the currencies of commodity-producing countries such as Australia, Canada and Mexico. The gains stand to increase Americans’ purchasing power abroad but are likely to further punish the earnings of U.S. multinational firms at a time when a sharp decline in energy companies’ earnings is pressuring the outlook for broad stock indexes.

Buyers piled into A-B InBev’s bond sale, which attracted more than $100 billion of orders. Many said they were enticed by the relatively attractive yields offered on the debt and the company’s investment-grade credit ratings, which are in the single-A range.

The bonds also give investors exposure to a relatively recession-resistant source of consumer spending and a haven away from troubled energy and mining companies.

“We were actually joking internally that even if the U.S. goes into recession, this combined company will probably benefit,” said Christopher Coolidge, a portfolio manager at Brandywine Global Investment Management, which manages about $69 billion in assets and put an order in for the bonds. “If we hit a recession, everybody drinks more.”

Indirect bidding at Wednesday’s Treasury auction, a proxy for foreign demand, jumped to 71%, the second-highest on record for the 10-year auction.

“People are worried about China, oil, stocks…you name it,” said Justin Lederer, senior trader of interest rates at Cantor Fitzgerald in New York.

Ahsan Baig

The Canadian Securities Institute


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Inside Financial Markets was a joint publication of Pakistan Stock Exchange (PSX)and Society of Technical Analysts Pakistan (STAP)