Stock Markets Sink, Suggesting Global Rout Will Last

Stock Markets Sink, Suggesting Global Rout Will Last


• European shares fell in morning trading after sharp declines in Asia. Stock markets in Frankfurt, London and Paris all declined by around 2.5 percent by midday in Europe.

• Japanese shares were down about 7 percent at one point, before ending 4.7 percent lower, while Hong Kong and Taiwan closed down about 5 percent.

• The selling was broad, hitting companies of all sizes across many industries. An index of Chinese businesses listed in Hong Kong fell nearly 6 percent, while shares of all 30 companies listed on Germany’s benchmark DAX index were down.

In Europe, a decade of extraordinarily low interest rates is coming to an end. The European Central Bank is winding down the money-printing program known as quantitative easing and could begin raising its benchmark interest rate — currently zero — next year.

That would have two impacts on the stock market. For one, companies, some of which have been able to issue bonds paying little or no interest, would have to pay more to borrow in the future, which could cut into profits.

At the same time, higher interest rates are making bonds more attractive as an investment, prompting investors to shift some of their money out of stocks. The yields on 10-year bonds, which move inversely to prices, fell across Europe on Tuesday, indicating increased appetite for the investments.

An improving economic outlook has also meant European unions are demanding relatively hefty pay increases after years in which they settled for stagnant wages in return for job security. The IG Metall union in Germany, which represents workers at big companies like Daimler and Siemens, negotiated a new contract early Tuesday that provides for an effective annual pay increase of more than 3 percent through early 2019.

The contract applies only to workers in the state of Baden-Württemberg, in southwest Germany, but it will serve as a model for agreements in other German states.

Christian Hille, a senior fund manager at Deutsche Asset Management in Frankfurt, said that much of the selling was by investors compelled to move out of stocks for technical reasons — for example, because they manage a fund that has an obligation to limit losses to 2 or 3 percent.

“We think that the movement is a bit overdone,” said Mr. Hille. He predicted that stock markets would eventually settle down because of the strong global economy.

“We are seeing a synchronized global upswing, which will be supported by U.S. tax stimulus,” he said. “We expect higher corporate profits.”

On Tuesday morning in Europe, futures that track American stock market indexes fell slightly, and analysts digesting the numbers from Asia said they did not expect the selling to let up anytime soon.

“This is the beginning of a more meaningful setback in a market that was, at least from the nonfinancial sectors, very overvalued and there was a lot of euphoria,” said Jonathan Garner, an Asia and emerging markets equity strategist at Morgan Stanley.

“I don’t think this is a ‘one-day’ that finishes today,” he added.

Wall Street’s so-called fear gauge, the VIX index, shot up to its highest level since the summer of 2015, when a sell-off in China prompted a global tumble in markets. The index tracks overall market volatility.

Investors seem mostly to have been spooked by concerns about the potential for rising inflation in the United States. Still, the share run-up of recent months has been global, and experts said a number of markets elsewhere were also due for a readjustment.

In China, in particular, markets were overheated after a steep rise since the start of this year, said David Cui, China equity strategist at Bank of America Merrill Lynch.

“Given how bullish the market has been positioning, there could be a reasonable period of adjustment,” Mr. Cui said, referring to Chinese stocks.

“It’s not going to be a two-day phenomenon,” he added. “If you take a few-months view, there is a chance this is the start of a decent correction.”



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