The US stock market suffered its largest decline this year, alongside investors snapping up protection against a possible rise in volatility, pointing towards the nervousness over the recent rally.
The S&P 500 dipped 0.6 per cent to 2,281, its biggest one-day fall since December 28. The Dow Jones Industrial Average was down 0.6 per cent to 19,971, while the Nasdaq Composite dropped 0.8 per cent to 5,614.
A measure of expected volatility for US stocks responded with its largest move upwards since the US election, but nonetheless remained at historically low levels.
Despite volatility remaining low, and sentiment still broadly constructive for equity markets, investors are taking the opportunity to buy cheap protection, hedging against the possibility of a sudden downturn in stock prices.
Traders have attributed some of the activity to one investor, now nicknamed “50 cent” because they purchase protection on the Vix volatility index each morning at a price of just $0.50.
“Given all the political uncertainty, it is odd for the Vix to be so low and people are loading up on equity crash protection while it is cheap,” said Pravit Chintawongvanich, head derivatives strategist at Macro Risk Advisors.
US airline stocks were among the worst performers on Monday, after President Donald Trump blamed a Delta Air Lines systems outage for widespread confusion over the implementation of his travel ban, despite the technical problem coming well after issues at airports across the country had begun.
Delta shares dropped 4.1 per cent to $47.67 in New York on Monday, alongside American Airlines, which fell 4.4 per cent to $44.90, and United Continental Holdings, down 3.6 per cent to $71.72. Alaska and Southwest, the other two airline stocks in the S&P 500 index, were also hit, down 1 per cent to $94.16 and 0.7 per cent to $52.35, respectively.
It comes after Mr Trump’s travel ban caused turmoil at airports across the US over the weekend, as people travelling to the US from seven Muslim-majority countries — including refugees and green card holders — were detained when trying to enter the country.
Mr Trump blamed a systems outage at Delta that resulted in flight cancellations on Sunday evening and Monday morning. But the technical issue came well after detentions and protests had begun across the country on Saturday morning.
Delta’s issue follows computer glitches that have grounded flights run by United Airlines, Air Canada and Porter this year.
“It makes people nervous in a broader sense,” said Chris Higgins, an aerospace and airline analyst at Morningstar. “These IT issues seem to be happening over and over again, so when there is a problem like this people see it as a broader problem.”
Mr Higgins added that travel was “very discretionary”, meaning the travel ban could be off-putting even to those who were not from the affected countries.
Elsewhere, Bank of America Merrill Lynch strategists on Monday forecast that the benchmark 10-year US Treasury yield would rise above 3 per cent by the end of the second quarter, as renewed vigour in the so-called Trumpflation trade continued to be bolstered by strong economic data.
In a lighter morning for earnings announcements, Fitbit, the maker of fitness trackers, issued a profit warning on the back of a disappointing holiday season and said it would cut 6 per cent of its workforce, pushing its shares down 16 per cent to $6.06.