Live Blog

The Latest Updates on the Market Sell-Off

Wednesday October 10, 2018
Good morning from Sydney. This is Bloomberg’s Markets Live blog for Thursday, Oct. 11. Terminal clients can click here to review Wednesday’s action, which included a stunning slump in U.S. stocks as dip buyers went MIA and put options flew off the shelves, debates on whether risk assets will start to look cheap once the dust settles and a tough day for European stocks as Louis Vuitton’s China woes hurt French equities.
Wednesday was a day of superlatives for the U.S. stock market, and not in a good way. Here's a quick recap of the lowlights:
  • The S&P 500 tumbled 3.3% on the day, its worst drop since the correction in February. It's down almost 5% from its last record in September. Among 24 industry groups, all fell -- the consumer durables and apparel, software and services, semiconductors and media and entertainment groups lost at least 4.5% for the biggest declines. The 5.4% drop in the consumer-durables and apparel sector was the worst since 2011, led by 8.4% plunges in Ralph Lauren and Tapestry
  • The Nasdaq 100 sank 4.4%, its worst drop since 2011 while the Nasdaq Composite slid 4.1%, biggest loss since 2016.
  • The Dow Jones Industrial Average's 3.2% slide was its worst since February. All 30 stocks fall.
  • The VIX jumped 7 vols to almost 23, its highest level since April
Wednesday was a day of superlatives for the U.S. stock market, and not in a good way. Here's a quick recap of the lowlights:
  • The S&P 500 tumbled 3.3% on the day, its worst drop since the correction in February. It's down almost 5% from its last record in September. Among 24 industry groups, all fell -- the consumer durables and apparel, software and services, semiconductors and media and entertainment groups lost at least 4.5% for the biggest declines. The 5.4% drop in the consumer-durables and apparel sector was the worst since 2011, led by 8.4% plunges in Ralph Lauren and Tapestry
  • The Nasdaq 100 sank 4.4%, its worst drop since 2011 while the Nasdaq Composite slid 4.1%, biggest loss since 2016.
  • The Dow Jones Industrial Average's 3.2% slide was its worst since February. All 30 stocks fall.
  • The VIX jumped 7 vols to almost 23, its highest level since April
Wednesday was a day of superlatives for the U.S. stock market, and not in a good way. Here's a quick recap of the lowlights:
  • The S&P 500 tumbled 3.3% on the day, its worst drop since the correction in February. It's down almost 5% from its last record in September. Among 24 industry groups, all fell -- the consumer durables and apparel, software and services, semiconductors and media and entertainment groups lost at least 4.5% for the biggest declines. The 5.4% drop in the consumer-durables and apparel sector was the worst since 2011, led by 8.4% plunges in Ralph Lauren and Tapestry
  • The Nasdaq 100 sank 4.4%, its worst drop since 2011 while the Nasdaq Composite slid 4.1%, biggest loss since 2016.
  • The Dow Jones Industrial Average's 3.2% slide was its worst since February. All 30 stocks fall.
  • The VIX jumped 7 vols to almost 23, its highest level since April
There was a laundry list of catalysts cited for Wednesday's plunge in U.S. equities. In addition to the recent rapid rise in interest rates, there was news of Fastenal's margin pressures following yesterday's news of PPG's margin pressures.

Both were at least partially related to U.S.-China trade tensions. There was also LVMH's confirmation that China was cracking down on undeclared imports, which crushed luxury-goods stocks from Paris to New York. Chipmakers struggled again as China's Huawei takes on American rivals in the AI space. There was also the huge volume in S&P 500 puts early in the morning and, as Arie Shapira wrote, a general unwind in cyclicals that seems to be continuing. And don't forget we're in the middle of the darkest time of the buyout blackout period, as Bloomberg Opinion's Stephen Gandel reminds us.

That said, most of this news was in the mix before the stock market even opened. So the steady snowballing of losses throughout the day, coupled with the lack of major contagion in other asset classes, suggests much of the selling likely was forced. Whether it was margin calls, or quant funds reacting to signals directing them to deleverage and sell stocks, or something tied to the short-volatility trade, we may never know exactly. But it's safe to say that the fundamentals in no way shifted enough in one day to warrant a 3.3% drop in the S&P 500. The spasms of selling may not be over, but neither should they be enough to completely derail a buoyant market for the rest of the year. Another crooked V-shape recovery is likely in store.
Asian assets are set to follow the late-Wednesday swan dive performed by U.S. stocks, with the key question for local traders being whether markets can hold the line after an opening recalibration. Index futures for most of the Asia-Pacific region’s biggest bourses dropped ~2% or more, while NDFs are signaling declines for emerging Asian currencies including the Korean won, Malaysian ringgit, Taiwan dollar and Indonesian rupiah.

As the day grinds on, China markets may dictate the evolution of Asian sentiment. The Shanghai Shenzhen CSI 300 Index closed about 3 percent above last month's 2-year low. With the MSCI China ETF slumping more than that overnight, that line in the sand is likely to be broken early.

Thankfully, Asia’s traders will have very little in the way of meaningful data to distract them. South Korea reports its current account, and we’re still waiting for China FDI and lending data.
President Trump has upped his rhetoric against the Federal Reserve, adding just now that he thinks the central bank ``has gone crazy'' after saying earlier this week he doesn't like the tightening campaign.

There's a surprising lack of backlash to the president's latest Fed criticism. The last time he spoke up, it caused a multi-day debate about central bank independence being a must. Maybe there are too many other concerns out there this time. Or, between stocks getting hit, trade and tariffs, etcetera, I wonder if you'll start to hear people look at their portfolios and decide they agree with him. The outside pressure on Jerome Powell may start getting worse.
Thailand equities may offer a rare bright spot in Asia on what's lining up to be another very rough day for emerging assets. Thailand shares were the strongest performers on a mixed Wednesday for regional bourses, and the Thai ETF actually eked out gains overnight. Indian shares also may offer some relative calm, both because they open so much later and because the India ETF only weakened a moderate amount.

Malaysia is set for a real shellacking as a slide in crude adds to its pain, while China, Taiwan and Korea shares also face early pressure.

Wednesday was the third time this year the S&P 500 fell more than 3%. That's the highest total since 2011 when the European debt crisis rattled the market. In comparison, last year we had no such single-day slumps.

The frequency of such big moves is on the high side historically: 3%-down days occurred 2.3 times a year on average since 1980. Get used to a higher frequency of large slumps as the Fed continues to tighten financial conditions.
AUD/JPY will be pushed to the top of quote tickers for many traders in Asia as a real-time gauge of how deep risk aversion is spreading Thursday. The cross has been steadily falling this year, so it may appear to have priced in a lot of bad news. But, some of that is related to specific Aussie underperformance -- any pain from a broad risk-off impulse that drives a stronger yen is yet to come.

The first marker of significance will be the September low at 78.688. Cracking that would bring the cross into territory last seen after Donald Trump was elected in November 2016. Once downside momentum is triggered, AUD/JPY has a tendency to dive fast and deep. As Cameron Crise noted, there is also AUD/CHF to keep in focus as a backup indicator of risk aversion.
U.S. stocks plunged Wednesday and traders have been saying this was a correction that had been brewing for some time (even if it ended up being a very sharp and sudden one). But what about Asia? As the trading day gets going, Asia could actually see a more restrained selloff than the U.S., given markets out here haven't seen the steep rally American equities experienced.
Most major markets here are in the red for the year or close to flat, compared with the S&P 500 that was up about 8 percent YTD before Wednesday's selloff.

We all know that when the U.S. stock market sneezes, Asia usually catches a cold. Some nasty gaps down loom for Thursday's open, and it is possible that will lead to some very sick equity indexes as the day winds on. Or maybe this time round, Asia will only end up with a few mild sniffles.
The global market decoupling could only last so long, and it's becoming increasingly clear that the rest of the world is set to pull down U.S. shares, rather than vice versa.

Until the U.S. stock selloff this week, the market narrative had been dominated by ``American exceptionalism.'' As their markets decoupled, relative financial conditions between the U.S. and Asia ex-Japan reached extreme levels, with the former being loose and the latter tighter. In fact, the difference (as measured by Bloomberg gauges) reached more than 2 standard deviations last month.
Now, the indexes are starting to converge, with the funding environment in both regions becoming less accommodative.

A persistent period of tighter financial conditions would certainly slow growth. In that sense, the ``American exceptionalism'' trade may be over for now.
Raphael Bostic says the Fed isn't tapping on the brakes, seemingly the first response from the central bank after President Trump upped his rhetoric against the Federal Reserve.

It's certainly hard to pin Wednesday's equity rout on the Fed. But, this could be the beginning of a public debate between the White House and the rate setters over the direction of monetary policy, which will only add to investor angst and help keep the VIX elevated.

As Richard Breslow noted earlier, the outside pressure on Jerome Powell may start getting worse.
Thursday October 11, 2018
Sure enough, the selloff from the U.S. is carrying over.


London copper is also slumping at its open, while the won's just dropped to the weakest in a year. Recoveries from here are possible if cooler heads prevail, but the headwinds are getting very strong.
Ignoring the noise and taking a broader view:

What has happened?
  • Equities have slumped, with the pain focused on the U.S. The VIX has spiked. Commodities have also weakened -- led by oil -- and so has high-yield credit. All things considered, FX and rates markets are relatively stable.

How will Asia react?
  • Asia stocks will follow their global peers to some extent, but they shouldn't suffer quite as badly. The theme of U.S. equity outperformance has been well documented and is overdue a correction. The rest of the world can't ignore U.S. pain, but long-term investors are likely already starting to look for excess value in some beaten-down Asia markets. That's especially true if these U.S. equities losses soften the previous pressure from higher U.S. yields and a stronger dollar.

Will there be more cross-asset volatility?
  • You'd expect a little more, only amid portfolio readjustment to account for a seemingly new trading regime. But there's unlikely to be panic in other assets.

What next?
  • It's logical to look to China markets for their reaction. As Garfield Reynolds highlighted earlier, they are likely to break their two-year low today and the price-action around that will be important. Given the discounted valuations already seen in many mainland China stocks, fresh lows are unlikely to trigger panic and major outflows, but dip-buyers have been scarred too much this year to rush in as well.
  • When Europe comes in, look to Italian yields. Italy's problems are unrelated but that's one of the areas most vulnerable to taking a nasty turn if broader deleveraging takes place among growing risk aversion.
  • And then we'll be back to the U.S. Ultimately, this is a U.S. equity problem. Is the bull market over and we'll see more panic Thursday? Most likely the pressures will ease up a bit. Amid solid growth and strong earnings, there's little reason for a sustained bear market, but U.S equities may go on underperforming global peers in the weeks ahead.
The MSCI AC Asia Pacific Index has fallen 2% on average following declines like the one just seen in the S&P 500. That's based on the last five instances the U.S. gauge dropped 3.2% or more, going back to 2015. The Asian index is down 1.6% on the day for now.

Walking through history, the S&P 500 suffered two big declines within a few days in Aug. 2015. Then there were two steep drops within a handful of days in Feb. 2018. The pattern suggests the next leg down for U.S. shares may be just around the corner.
USD/JPY has enjoyed a solid uptrend since March, but that will be hard to sustain if the equity fallout on Wall Street extends through the rest of this week. In classic risk-off scenarios, both the yen and dollar typically attract haven flows, but it is often JPY which comes out on top driven by the weight of Japanese money returning home.

USD/JPY often sees a deep reversal once it snaps major trendlines. The most recent example was in late January, when the break of 110 led to a swift decline toward 104.56. For the record the current line to watch comes in at 111.58.
Asia has shown zero sign of panic yet.

Equity markets are sharply lower but are doing no worse than anticipated: both U.S. and Japanese stock futures are trading roughly where they were four hours ago -- and trying to edge higher. Asia hasn't run any further with the negativity.

There's no sign of dip-buying yet, but that was never likely to come before China's markets give their guidance.
The calm across non-equity markets will give a platform for renewed risk-appetite if the first half hour of China trading permits -- it's all about whether the calm reaction of Asia sustains through headlines about mainland equities testing/breaking their two-year lows.
The recent surge in Treasury yields was driven by factors that aren't about to go away, so the overnight haven bid for U.S. bonds could readily evaporate.

The sudden surge in U.S. yields above 3% represents a liquidity tantrum as the Fed's quantitative easing turns to tightening. Treasuries made sense as haven assets when 10-year yields hovered between 2.8%-3%. But above 3%, the risk for further spikes makes them more a cause of concern than an attractive place to park cash as investors exit risk assets including U.S. stocks.

While the 10-year yield retreated late Wednesday after oil started to slump, September's heady PPI growth earlier pummeled Treasuries, pushing the benchmark yield to an intraday high of 3.24%. Any investors still seeking shelter in Treasuries may face a rough ride if Thursday's CPI print surprises to the upside.
The PBOC's yuan fixing today was right in line with estimates and with Wednesday's setting also. That signals its intention to keep the currency stable in times of market stress.

While depreciation pressures have ramped up after China introduced stimulus measures to shore up growth amid the trade wars, the yuan may avoid breaking decisively through the key 7 level for now. The PBOC sets the speed and course of the yuan's next move and it is looking to set a steady course.
With most Asia equity markets now open, it's looking bleak - albeit only as expected and no worse. Here are some of the more dramatic numbers:
  • Taiwan's TAIEX is down more than 5% to a 16-month low
  • Japan's Topix Index is down ~3.5%
  • Hang Seng has fallen more than 3% to a 15-month nadir
USD/KRW is jumping higher in early trading, reaching territory not seen for a year -- that could be an ominous signal for Asian FX. THB, PHP, IDR, TWD and INR are all candidates for being swept along in the negative tide.
Although, judging by the yen, G10 looks entirely unfazed so far.
U.S. equity futures have broken the overnight lows and the losses are accelerating. It's certainly a terrible day to be long equities anywhere, but it's worth reiterating how concentrated the pain is asset-wise.

G10 FX is just starting to see a little contagion, with the dollar dipping on this latest U.S. equities move. But, generally, the reaction in FX, rates, commodities and credit shows there's no major shift in the global growth/economic outlook. That will provide confidence to long-term bulls, but no-one will want to catch any falling knife just yet.
Volatility gauges have jumped enough to highlight investors' concerns that Wednesday's rout could lead to further pain. But there's a chance markets settle down, with key gauges shy of levels that accompanied equity routs earlier this year.
Just as in February, bond volatility has led the charge this time round with the MOVE index for Treasuries jumping noticeably earlier than the VIX fear gauge for the S&P. Both vol indexes are a under where they were in March, when the S&P 500 was able to recover as investor angst faded.
U.S. equities shrugged off the next bout of bond volatility in May as the VIX remained quiet, after which the S&P took off in June while EM assets slumped.

A retreat for both MOVE and VIX in the coming days would be something of an all-clear clarion for global risk assets, while further spikes would provide a genuine reason for alarm.
For anyone looking for reasons for a rebound, the MSCI AC Asia Pacific Index's relative-strength index just dropped to ``oversold'' levels. The indicator brought a temporary lift to shares when it happened three times earlier this year. Also, the index's dividend yield just jumped to 2.75%, the highest level since 2016.
There's a notable sense of déjà vu about how U.S. equities are trading.

February's stocks meltdown, when the S&P 500 index corrected more than 10% after America's biggest wage growth since 2009 caused a selloff in Treasuries. This time, strong economic data and an oil-fueled boost to inflation expectations pushed yields to new highs.

If February is any indication, the S&P 500's decline has further to run. Back then the rebound began Feb. 9 after a drop of as much as 12% from Jan. 26's intraday high. Rising yields aren't necessarily a bad thing for stocks -- they got used to them during the post-March rally. I still reckon the Fed's hikes are a testament to robust U.S. growth.

But, the pace at which yields are rising is alarming investors across asset classes, boosting risk aversion. It remains to be seen if Trump's displeasure with the Fed will be followed by a slower pace of tightening.

On a day like Wednesday, when the U.S. stock sell-off seems indiscriminate, it's often worth looking at who managed to escape the bloodbath.

In the S&P 500, Perrigo Company PLC, Dollar Tree Inc., Kohls Corp and Campbell Soup Co. all managed to close in the green. While there are a idiosyncratic factors at play here, including management changes and activist speculation, it's still an ominous sign of investor faith in the longevity of the U.S. economic expansion. Demand for exposure to discount retailers, lower-end department stores, generic pharmaceutical manufacturers and soup makers doesn't sit well with the recent upbeat assessment on the American economy from Federal Reserve Chair Jerome Powell.
S&P 500 Index Wednesday Outperformers
An across the board sell-off sees Prada drop more than 10 per cent - most since Sept. 2017. Perhaps a knee-jerk reaction to what LVMH said overnight? The luxury brand said China is enforcing customs rules more strongly on non-declared imports.
We said to look at China equities for a lead and the price-action there is relatively constructive. As anticipated, the benchmark CSI 300 opened below the 2-year low -- but it's only traded higher since. Given how volatile that market is, a reading of roughly -2.5% isn't a cause for alarm -- and arguably a positive signal for broader market participants.

Given the index is down more than 20% this year, dip-buyers may soon get tempted to start testing the waters.
There's a theory among some sell-side analysts -- notably Matt King at Citigroup Inc. -- that investor behavior has changed dramatically in the era of easy money, making the market more vulnerable to sell-offs like the one we're seeing.

The essence of that argument is that price movements used to be self-limiting. Investors would pursue certain assets until yields or valuations became unattractive, at which point a correction would occur and prices would reduce. That changed in the wake of the financial crisis when investors learned that outperformance could essentially be chased indefinitely. (In a world of asset-price inflation accompanied by suppressed consumer price inflation, chasing inflows became the easiest and most surefire way for investors to generate outperformance). The result is a market that bids itself ever higher, until the bidders suddenly step away and the bottom falls out.

Call it the "pros chasing flows" phenomenon -- it helps explain why the things that suffer the most in these periods are usually the things that saw the most money pour in.
IMF Managing Director Christine Lagarde is speaking right now at a press briefing to mark the opening of the annual meetings of both the IMF and World Bank Group on the Indonesian island of Bali. She says the world economy is strong, but not strong enough. ``We need stronger international cooperation,'' she says.

To watch the briefing, Bloomberg terminal subscribers please click the following image.
Source: IMF Webcast
Japan's 30-year bond sale Thursday should benefit from the flight to quality as stocks fall. Yields that are approaching 1% for the first time since 2016 will also help. The auctions this year, which are held every month, have drawn an average bid-cover ratio of 4.35.
Multiple technical support levels in the S&P 500 were breached in short order during Wednesday's sell-off, but the big one -- the 200-day moving average -- held, or at least was saved by the closing bell. But now it has been breached too, albeit in the lower-liquidity after-hours session for U.S. investors. The 200-dma has been super dependable as the line in the sand where selling spasms halted during this year's previous weak spells, so bulls will be nervous how this test pans out:
The Shanghai Composite is gapped through the September lows. China's stimulus measures just aren't enough to heal pessimism among mainland traders. Outstanding margin purchases for Shenzhen and Shanghai shrank all year, so the lack of appetite from retail investors -- who have dominated those markets -- makes for a grim outlook. There may be more losses ahead unless the SHCOMP closes above that September trough.

It's early days but an answer may be forming to one of the key market questions of the last number of months: will stocks in the rest of the world catch up with a U.S. equity rally or will their American counterparts catch down?

One thing that stood out during Wednesday's sell-off was the outperformance of value shares, often linked with a turn in a bullish market trend. Bloomberg's U.S. Pure Value Portfolio Total Return Index showed a positive return of about 0.5 percent, compared to an essentially flat Growth Portfolio and a Momentum Portfolio that fell about half a percent.

U.S. value shares have been outperforming since the end of September, according to MSCI indexes. But that's a trend that is well established in Asia, where value stocks have been beating their growth peers since July, amidst a broad market sell-off. Investors normally look to the U.S. stock market for direction -- this time it seems international equities may be the ones leading the way.

Equities are softer again:
  • U.S. S&P 500 E-Mini futures are trading below the 200-DMA
  • Taiwan's TAIEX is 6% down; leading losses
  • Topix down 3.5%
  • Kospi down 3.3%
  • HSI down 3.7%
  • CSI 300 falls 3.4%
USD/CNH is pushing higher on Thursday after the yuan fixing was set within a few pips of the forecast, offering no concession at all to Steven Mnuchin, who warned China about devaluing its currency.

The U.S. Treasury Secretary is facing pressure from the White House to formally impose the designation of FX manipulator on China for the first time since 1994.

USD/CNH 1-year forward points are also rising. So if the PBOC doesn't send out its agents to dampen speculation against the yuan, investors won't have to wait until year-end to find out whether or not 7.0 is going to be reached.
Emerging markets look well positioned to bottom out before high-flying U.S. assets.

China is putting growth ahead of deleveraging, and that should benefit EM equities that are already approaching the lowest valuations since 2008. China's recent moves including a cut in reserve requirements, approval of infrastructure projects and the expansion of its too-big-to-fail program will act to curtail fears that the trade wars will crimp growth in Asia's biggest economy.

The Federal Reserve is looking to tighten beyond its neutral
rate, which would act to slow U.S. growth, so the risk-reward
picture may favor EM over America going forward.

As U.S. equity futures take a dive lower, trading volumes are soaring with a stunning 3.3 million lots traded on Wednesday.

The morning session in Asia is also seeing a very punchy 180k+ lots go through, at the same time the long-term trendline noted by Michael Regan is being tested.

Taiwanese traders are in panic mode, with the Taiex's more-than 6% loss dwarfing Wednesday's slide for U.S. chip stocks. Any further decline in the Philadelphia Stock Exchange Semiconductor Index may justify more pain for the Asian island's stock market and its hefty tech sector weighting. The hope for investors in names like Taiwan Semiconductor and Hon Hai Precision is that today's rout is indeed too far and too fast to be true.