Tuesday 18:30 GMT
What you need to know
● Sell off in financials drives S&P 500 down 1 per cent
● Euro climbs to $1.08 and dollar index slips below 100
● 10-year Treasury yield at lowest since start of month
● Oil prices come under renewed pressure
● Gold heads for fifth daily rise in a row
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Overview
A sharp and sudden sell-off for US financial stocks helped put the S&P 500 on course for its worst day since mid-October and provided fresh momentum to the recent rally in Treasuries — adding to pressure on the dollar.
Easing political concerns in the eurozone pushed the euro above the $1.08 level while sterling hit a three-week high within a whisker of $1.25 after the release of robust UK inflation data.
Energy stocks were also big fallers as oil prices dropped yet again, although gold rose for a fifth successive session to its highest level since the start of this month.
Hot topic
Wall Street grabbed the headlines as the S&P 500 sank 1 per cent to 2,349 in mid-afternoon New York trade, with the financial sub-index 2.3 per cent lower. The last time that the US equity benchmark closed more than 1 per cent lower was on October 11 2016.
The CBOE Vix volatility index, watched by many as a gauge of stock market stress, was up 8.9 per cent to 12.35, putting it on course for its highest close since March 1 — but was still way below its long-term average of about 20.
“The quick turn lower [for the S&P] has certainly spooked an investment community that had become accustomed, however reluctantly, to a steady, attritional grind higher,” said Chris Beauchamp, chief market analyst at IG.
“Valuations, a sudden spike in volatility, worries about the ongoing FBI-Trump spat and others can all be cited, but whatever the ‘real’ reason, we should not get overexcited just yet.
“It is still too early to give this rally the last rites.”
Divyang Shah, global strategist at IFR Markets, said: “A healthy correction will help gauge the strength of the trend but will also likely be painful enough so as to sow the seeds of doubt.”
Analysts at Capital Economics highlighted that the last time the cyclically adjusted price/earnings ratio (CAPE) of the US stock market was this stretched — around a decade ago — it subsequently plunged.
“High valuations can sometimes be the proximate cause of a correction in asset prices,” Capital said. “But this is usually only the case when valuations have risen to extremely lofty levels — the bursting of the dotcom bubble is one example. More typically, a separate trigger is required. One potential candidate this time around is tighter monetary policy.
“Persistently loose financial conditions suggest that the market is unwilling to do the Federal Reserve’s work for it, and we expect policymakers to raise interest rates in the next couple of years by more than investors are currently anticipating.”
US Treasuries rose sharply as equities sank, pushing the yield on the 10-year note down 4 basis points to a near three-week low of 2.43 per cent, and that on the two-year down 2bp to 1.27 per cent.
Forex
The drop in Treasury yields helped push the dollar index — a measure of the US currency against a basket of peers — down 0.7 per cent to 99.68 — its first foray below 100 since early February.
“The pressure on the dollar has picked up as US Treasuries rallied hard amid signs of disagreement among Republicans ahead of a key vote on the repeal of Obamacare, a sign for some that other dollar-supportive initiatives on the part of US President Donald Trump will face a tough uphill battle from here,” said John Hardy, head of FX strategy at Saxo Bank.
The euro was up 0.7 per cent at $1.0812 amid an easing of worries about the forthcoming French election.
“In the early hours of the morning the euro appreciated because the independent presidential candidate Emmanuel Macron emerged as the winner from the French presidential debate,” said Esther Reichelt, currency analyst at Commerzbank.
“Fears of a surprise victory of the populist candidate Marine Le Pen, who once again demanded a referendum on France’s future in the EU and that France leave the euro, are abating.”
The dollar was also down 0.6 per cent versus the yen at ¥111.85.
Equities
The sell-off on Wall Street prompted the Euro Stoxx 600 index to reverse an early rise and close 0.5 per cent lower, with the Xetra Dax in Frankfurt shedding 0.8 per cent and the UK’s FTSE 100 losing 0.7 per cent.
The latter was further burdened by a 1 per cent rise for sterling to $1.2484 after data showed the annual rate of headline UK inflation coming in well above expectations at 2.3 per cent.
“Now that inflation is starting to rise sharply, the question is will the BoE try to protect living standards and bring inflation down by raising interest rates?” asked Kathleen Brooks, analyst at City Index.
In Tokyo, the Topix index fell 0.2 per cent as markets reopened after a three-day weekend, while a noteworthy performer in the region was Hong Kong’s Hang Seng which climbed 0.4 per cent to its highest mark since August 2015 as analysts noted buying from mainland China.
Commodities
The softer tone of the US currency failed to help oil prices, as Brent crude fell 1.1 per cent to $51.07 — not far from last week’s three-month closing low — .amid persistent concerns about high levels of US crude inventories.
But gold jumped $12 to $1,245 an ounce, the highest since early March and its fifth straight daily gain.
Additional reporting by Hudson Lockett in Hong Kong
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