US stocks fell on Monday, tracking a sell-off in global equity markets, amid a deepening rout in all but the safest assets.
The Standard & Poor’s 500 Index slid 4.8 per cent to 1,876.16 at early morning in New York, with the benchmark hitting its lowest level since October.
The Dow Jones industrial average meanwhile fell more than 1,000 points in early trading.
“GDP growth in the US and euro-zone economies just isn’t strong enough to prevent a global disinflationary shock from accumulating,” Thomas Thygesen, SEB’s head of cross-asset strategy, said by phone from Copenhagen. “People have realised there could be further weakness in the Chinese currency. They don’t seem in control of the situation and we could see feedback loops that haunt the US”.
Calm in the US market shattered last week, with volatility soaring by the most on record as the Dow entered a correction and investors dumped the biggest winners of 2015. A gauge of volatility expectations more than doubled last week. Shares succumbed to a global sell-off that’s wiped more than $5 trillion off the value of equities around the world since China’s shock currency devaluation on Aug. 11.
Moreover, speculation had been building all year for the Federal Reserve to raise interest rates in September for the first time since 2006, following the end of quantitative easing in 2014.
Traders are now pricing in less than a one-in-three chance the central bank will act next month, from about 48 per cent just before the yuan devaluation, as the rout in equity markets has shaken confidence that the global economy will be strong enough to withstand higher US rates.
“The chickens are coming home to roost,” Mr Thygesen said. “We’ve been too hopeful that Fed tapering didn’t matter, that they could hike interest rates and we’d still have a healthy economy. Since the Fed stopped bond purchases, they’ve been choking the life out of global manufacturing and that matters most for commodities and emerging markets.”
The S&P 500 is down 7.5 per cent from its last record in May, and on track for its worst August decline in 14 years. It sank the most since 2011 on Friday amid signs China’s economy is weakening. A gauge of volatility expectations more than doubled last week.
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