The global retreat from risk intensified Tuesday, sending the
Dow industrials to a 295.64 point decline and pushing U.S. crude
futures to their deepest two-day drop since the financial
crisis.
Investors around the world sold stocks, registering losses of 2%
or more in many indexes across Europe, and purchased government
bonds. The yield on the 10-year U.S. Treasury note tumbled to
1.864%, a level last seen in the spring of 2015. Yields fall when
prices rise.
The action came on a day that had no major economic news beyond
a few downbeat earnings reports. Selling was intense in
economically sensitive sectors, such as energy, banks,
asset-management firms and cruise lines, and in industries whose
shares often led the market during the long U.S. bull run starting
in 2009, such as biotechnology.
Utility stocks rallied, reflecting the promise of regular
periodic payouts that investors covet at a time when interest rates
are low and markets are in flux.
Yet even as stocks tumbled and bonds gained Tuesday, closely
watched sentiment gauges didn't signal unusual levels of fear, a
sign that investors said likely suggests that a wholesale flight to
the exits isn't likely.
Gold fell 60 cents, or less than 0.1%, and Wall Street's fear
gauge, the CBOE Volatility Index of options-derived trading
expectations, remained far below highs reached in August's market
rout.
"It tells me that perhaps the panic isn't there," said Rob
Bernstone, managing director in equity trading at Credit Suisse.
"People don't think the world is about to end, but they do think
that, on a risk-adjusted basis, equities don't deserve the
valuation that they had this morning."
Yields on two-year government bonds in Japan and Finland set
all-time lows below zero. Yields from Germany, France, the U.K.,
Belgium, Denmark and Sweden all fell.
Yields have fallen in many developed nations since the start of
the year as a big drop in global stocks and oil pushed investors to
focus on preserving capital. The slide in yields picked up more
momentum after the Bank of Japan surprised the global markets
Friday by lowering some short-term interest rates below zero,
joining the ranks of central banks in the eurozone, Switzerland and
Denmark in adopting negative rates.
"We have absence of growth, absence of inflation and continued
monetary stimulus," said Nick Gartside, international chief
investment officer of global fixed income at J.P. Morgan Asset
Management, which had $1.7 trillion in assets under management at
the end of December. "The bond market signals that the era of low
growth and low inflation is here to stay."
Tuesday's action was the latest sign that financial markets are
struggling to make sense of a constellation of unusual and often
contrary signals on the most basic questions, such as whether the
U.S. economy is headed for recession and whether the Federal
Reserve made a mistake in December when it raised short-term
interest rates for the first time since 2006.
The turmoil this year has prompted many investors to dive deeper
into market entrails, searching for answers in arcane indicators
and the correlations in seemingly loosely related markets such as
oil, which has fallen 11% in two days to settle at $29.88 a barrel,
and large-cap U.S. stocks. Yet few have come away feeling they have
a hammerlock on what is happening.
On Tuesday, some well-known fear indicators clashed. Japan's yen
rallied, a classic haven signal, but the Swiss franc, another
mainstay of investors seeking refuge, rose just 0.1% against the
dollar.
"People don't know what to do," said David Kotok, chief
investment officer at Cumberland Advisors in Sarasota, Fla. "Those
that are scared sell stuff and you have a self-fulfilling downward
spiral that has an emotional component, and it lasts until the
sellers are exhausted."
Riskier investments whose gains typically exceeded the market
average during the past seven-year bull market were hit hard. The
Russell 2000 index of small-cap stocks sank 2.3%. The Nasdaq
Biotechnology Index lost 3% and has lost nearly one-fourth of its
value so far this year.
The KBW Nasdaq Bank Index dropped more than 3%, taking the gauge
of large commercial lenders down 16% for the year. Declines have
foiled investors who gambled that the Fed's decision to begin
raising interest rates would bolster the fortunes of financial
stocks by allowing them to make more money from their lending
businesses.
Helping to drive Tuesday's declines, traders said: the sharp
drop in U.S. interest rates, which followed several downgrades of
the global growth outlook and the Bank of Japan's decision to move
to negative interest rates.
The decline in financial shares raises fears that the U.S. could
be headed for recession, but many investors said they believe
employment growth heralds a continued U.S. expansion. They are
focusing instead on earnings, which are expected to fall this
quarter, and other unusual sources of market uncertainty, such as
the presidential election season.
"How do we break out of that funk? We've got to have some
earnings," said Bob Doll, senior portfolio manager at Nuveen Asset
Management LLC. "Why is the stock market not going up? Because
earnings are not going up."
Many investors are finding it difficult to paint a picture of
the global economic outlook with the divergent paths of growth and
monetary policy for the U.S. and the rest of the world. Japan's
move to negative rates is the latest but far from the only example,
as many analysts focus on the possibility of a devaluation of
China's yuan.
"No doubt markets are generally confused, with divergent
monetary policy and a subtle currency war going on globally," said
Firas Askari, global head of currency trading at BMO Capital
Markets.
The Swiss franc, which traditionally drew investors to protect
capital in time of market stress, has failed to gain ground this
year. On Tuesday, the yen attracted stronger haven flows, up 0.8%
against the dollar. The franc lagged, up 0.1% versus the
dollar.
"The franc is no longer the currency to buy amid risk aversion,"
said Paresh Upadhyaya, portfolio manager at Pioneer Investments,
which managed $243.4 billion at the end of December. Mr. Upadhyaya
said negative interest rates adopted by the Swiss National Bank
have put a dent on foreign investors' interest in buying the
franc.
The VIX, rose 10% to 21.98. Investors aren't paying up for
options that protect against a plunge in the S&P 500 to the
degree that they were in the late-summer turmoil, said Michael
Purves, head of equity derivatives research at Weeden & Co.
"The world isn't falling apart, according to the options
market," he said.
Saumya Vaishampayan and Aaron Kuriloff contributed to this
article.
Write to Dan Strumpf at daniel.strumpf@wsj.com, Ira Iosebashvili
at ira.iosebashvili@wsj.com and Min Zeng at min.zeng@wsj.com
(END) Dow Jones Newswires
February 03, 2016 00:15 ET (05:15 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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