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Stocks

As US stocks slump, Donald Trump blames ‘crazy’ Fed and traders urge against panic

More than three per cent was slashed from major indices, with the S&P 500 and Dow falling the most since February and the Nasdaq 100 having its worst day in seven years

PUBLISHED : Thursday, 11 October, 2018, 7:01am
UPDATED : Thursday, 11 October, 2018, 10:02am

Wall Street stocks plummeted on Wednesday amid worries about surging US interest rates and the impact of trade disputes, as President Donald Trump blamed the Federal Reserve, saying it had “gone crazy”, and traders said there was no reason to panic.

US shares suffered a broad-based sell-off that slashed more than three per cent from major indices, with the S&P 500 and Dow falling the most since February and the Nasdaq 100 having its worst day in seven years.

“I think the Fed is making a mistake. It’s so tight. I think the Fed has gone crazy,” Trump told reporters shortly after markets closed on Wednesday. He has frequently criticised the US central bank for gradually raising interest rates.

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Trump has repeatedly touted Wall Street records as proof of the success of his economic programme, including his confrontational trade strategy. But he downplayed the first major drop in months on Wednesday, saying, “it’s a correction that we’ve been waiting for a long time.”

In fact it is his policies that are behind the changes: tax cuts and spending policies are expected to juice the economy, adding to the Fed’s justification to raise interest rates, while trade conflicts raise costs for companies, which could hit the bottom line in quarterly earnings – something analysts said helped prompt Wednesday’s sell-off.

I don’t think anyone senses any panic at this point … a lot of people think that something like this and even more downside are slightly overdue
Larry Weiss, head of trading for Instinet LLC

Meanwhile, a quick survey of 10 sell-side and buy-side traders found an “uptick in hedging activity” through Wednesday. Others said investors stepped in to add to positions, with most sell tickets driven by passive funds via programme desks.

“I don’t think anyone senses any panic at this point,” Larry Weiss, head of trading for Instinet LLC in New York, said by phone. “Given the levels we are currently at, a lot of people think that something like this and even more downside are slightly overdue.”

Jonathan Golub, chief US equity strategist at Credit Suisse, said there really wasn’t much in the form of new news. Rather, traders bailed out because others were.

“It’s just people saying ‘Gosh, my neighbour is selling,”’ Golub said on Bloomberg Television. “There is no news today. That to me means you’re going to take this back. I don’t know if it takes a day or a week. I would absolutely be buying this.”

At the end of September, the S&P 500 was up 9 per cent on the year, while the Nasdaq 100 had risen 19 per cent. At today’s close, the gains had been whittled to 4 per cent and 10 per cent, respectively. In general, the faster a stock went up, it came down.

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Many of the biggest US names fell hard, with Apple, Boeing and Facebook all slumping more than four per cent and Amazon, Nike and Microsoft dumping more than five per cent.

“The selling is not panicking but it’s persistent,” Briefing.com analyst Patrick O’Hare said of the proceedings. “It’s all about investors rethinking their exposure to stocks.”

O’Hare attributed the losses to worries about higher interest rates but also cited a “broad-scale deterioration in sentiment” as investors realised that the pullback on Wall Street failed to prompt bargain hunting to stabilise prices, as has been the norm in recent years.

Stocks have been under pressure since the yield on 10-year US Treasury bonds jumped above three per cent last week, a sudden move that raised fears of an overheating economy, speeding inflation and more aggressive Federal Reserve interest rate increases.

Last week’s jump in yields followed strong US data but many analysts have been anticipating dynamics in the bond market to change due to expectations that central banks in Europe and Japan will soon phase out bond-buying programmes.

“It’s shifting the tectonic plates,” said Jack Ablin, chief investment officer at Cresset Wealth advisers. He said the rising appeal of bond investments would be a challenge for stocks in the foreseeable future as capital moves out of riskier equities.

And while stocks could get a boost from strong corporate earnings, there are concerns the US trade conflicts will start to undermine profits.

The rout in US shares followed substantial losses on European bourses, due in part to tensions between Brussels and Rome over Italian budget plans that have revived fears about the euro zone.

“There are a number of worries for investors right now, from the pace of rising bond yields and the impact on investor sentiment, to Italy’s populist coalition playing a game of chicken with the European Commission, stalling Brexit negotiations and the ongoing trade conflict between the US and China,” said Craig Erlam, senior market analyst at Oanda trading group.

Bourses in Paris and Frankfurt both lost more than two per cent, while London fell 1.3 per cent.

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In Europe this week, the closely-watched spread between the rates on 10-year bonds in Italy compared with those offered by Germany, which is a measure of the added risk perceived by investors to holding onto Italian debt, hit the highest level since April 2013.

Markets have been shaken by a row between Brussels and Rome, which are at loggerheads after Italy’s populist government passed a purse-busting budget last week to the annoyance of the EU.

Shares in European luxury companies also lost much of their shine as investors feared that any slowdown in global economic growth would translate into dwindling sales for high-end firms. In Paris, shares in Kering fell nearly 10 per cent, LVMH over seven per cent and Hermes around five per cent.

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