October rout

PETALING JAYA: Asian equities, including Malaysia, were struggling to keep their heads above water in a sea of red following an overnight steep fall in the US markets, which clearly shocked complacent investors.

All the Asian markets stumbled, with Singapore’s Straits Times Index falling 2.60% to 3,050.07 points, Japan’s Nikkei 225 declining 3.89% to 22,590.86 points, Hong Kong’s Hang Seng dropping 3.54% to 25,266.37 points and China’s Shanghai Stock Exchange plunging 5.22% to 2,583.46 points following suit the US Dow Jones Industrial Average (DJIA), which fell 831.83 points a day before yesterday.

Coincidentally, observers pointed out that previous major market corrections such as the US subprime mortgage crisis in 2008 had also taken place in the September-to-October period.

Losses at home also coincided a day after the government said it was planning to introduce more new forms of taxes.

Locally, the FBM KLCI registered a steep fall a day before on Wednesday as well by 38.97 points or 2.2% in an apparent knee-jerk reaction to the government’s alert to the nation that it was planning to introduce more new forms of taxes to reduce the country’s outstanding debt.

By yesterday’s market close, the benchmark index was at 1,708.49 points. Over a two-day period, the FBM KLCI had lost a total of 65.66 points.

By the end of yesterday, the FBM KLCI had recouped nearly half of its losses to close lower by 26.69 points or 1.54% away from its day low of 1,682.98 points.

At its trough yesterday, just shortly after the market opened, the benchmark index lost 52.20 points or 3.01% from its previous day’s close.

Losers outnumbered gainers by 3½ times, while 3.1 billion shares worth RM3.70bil changed hands.

Dealers said both external and internal factors were at their height yesterday when Bursa Malaysia opened.

“The Dow Jones had fallen quite steeply by about 3%, and this had clearly shocked everyone. And what’s more frightening is that there does not seem to be any obvious trigger for this latest round of selloff in the US,” a dealer said.

OANDA Corp head of trading for Asia-Pacific, Stephen Innes, said in his commentary that there was not one plausible explanation for the latest equity tumult in the US.

Innes noted that the environment had been quite fragile in the first place, noting that the horrible intersection of risk aversion due to escalating US-China tensions and rising US rates had spooked investors.

Some other market observers pointed to a warning by the International Monetary Fund (IMF) that was published on Wednesday that risks to the global financial system have risen over the past six months and could increase sharply if pressures in emerging markets escalate or global trade relations deteriorate further.

According to wire reports, the IMF said market participants appeared complacent about the risk of a sharp tightening in financial conditions.

However, a similarly worded statement from the IMF had also been published on July 16 without any significant reaction from the investing public then.

Some international business news wires partly attributed the selloff in the US to fears finally erupting from rapidly rising rates by the US Federal Reserve (Fed).

US President Donald Trump had also commented on the market performance, noting that the fall in the DJIA was a “long-awaited correction”.

He also chastised the Fed for continuing to raise interest rates despite market turbulence, saying that it was “making a mistake” and that the Fed had “gone crazy”.

Trump continued his criticism of the Fed later in the day yesterday when reports carried his comments saying that it was ridiculous that the Fed was choosing to continue raising interest rates.

“The problem (causing the market drop) in my opinion is Treasury and the Fed. The Fed is going ‘loco’ (meaning crazy in Spanish) and there’s no reason for them to do it. I’m not happy about it,” Trump said.

He reportedly did not entertain the question that falls in the US markets on Wednesday might also be due to the escalating trade war with China.

In his note, Innes explained the selloff in the US, noting that the CBOE Volatility Index or the fear gauge had risen to above 20 for the first time since April and the selloff was more than just profit-taking but more indicative of a genuine “panicked” reaction.

On Wednesday’s close in the US markets, technology stocks led the fall and had recorded their worst day since August 2011.

“If the Feds are crazy, this market reaction is bordering on insanity, as so many negative crosscurrents collide that it is merely impossible to find a glint of optimism, and trust me, the markets are leaving no stone unturned as all hell breaks loose across the global capital markets,” Innes said.

“The US dollar is buckling under political pressure from Trump’s ‘Fed is crazy’ comment, but indeed, the severity of this equity rout could bring the hawkish Fed narrative into question,” he added.

Noting the gravity of yesterday’s decline in the Asian equity markets, Innes said investors remained on “full-out retreat” mode and that even the most pessimistic of equity bears were still in shock by the sheer magnitude of the move.

“This meltdown isn’t just a mild case of the sniffles, suggesting that the latest sneeze from the US equity market could morph into a global market pandemic,” he added.

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