Global stocks extended their selloff as investors continued to pare their riskier positions following strong year-to-date gains and the rise in geopolitical tensions this week.
European stocks fell Thursday, and U.S. stocks accelerated their fall with the Dow Jones Industrial Average suffering its biggest one-day decline since May 17 after President Donald Trump’s comment that his threat on Tuesday to unleash “fire and fury” on North Korea “maybe wasn’t tough enough.” U.S. indexes ultimately logged their biggest declines since May 17.
China raised the stakes with an editorial in the state-run Global Times late Thursday saying Beijing would intervene if there is a first strike against North Korea.
“This situation is beginning to develop into this generation’s Cuban missile crisis,” wrote ING’s Robert Carnell in a morning note to clients.
Before their decline in recent days, Asian markets had logged some of the world’s biggest gains this year. For some investors, the rising tensions between the U.S. and North Korea—and the typical late-summer slowdown in trading—are an opportunity to pull back and await developments.
“Market conditions were right for profit-taking” in stocks this week, said Alexander Ho Wan Lee, chief investment officer at Nimbus Capital Group.
Stock benchmarks in Hong Kong and Shanghai were all down more than 1.5% by midday, with Australia not far behind. Benchmarks in smaller markets elsewhere fell a bit less than 1%, while Japan’s markets were closed for a holiday.
Given the lack of sustained stock selling this year in much of the world — let alone large declines —concern that a market correction is at hand isn’t a surprise, analysts say. Many pullbacks have quickly reversed before they reached the 10% mark that commonly denotes a correction.
But the current geopolitical situation could keep potential buyers on the sidelines for now, said Lee — in fact, he added, it is already keeping some out of Asian markets, despite robust recent quarterly results from companies in the region.
In China, selling deepened as Friday morning progressed. Beijing warned of irrational trading in metals after steel-rebar and aluminum futures in China hit five-year highs this week.
Moving to the oil, rude futures turned lower on Friday, as oversupply issues remained a heavy drag for the market and players kept a close eye on escalating tensions between North Korea and U.S.
At the moment, the verbal jousting between the two nations hasn’t translated into any concrete actions, but markets are monitoring the situation closely.
Oil, like most commodities, such as gold, usually gets a boost in times of political tension. But there was little sign of that early Friday as oil-market fundamentals remain pressured.
On the New York Mercantile Exchange, light, sweet crude futures for delivery in September CLU7, -0.66% was recently down 43 cents, or 0.9%, to $48.15 a barrel in the Globex electronic session. October Brent crude LCOV7, -0.62% on London’s ICE Futures eased 47 cents or 1%, to $51.43. Both were up slightly earlier in the session.
In its latest monthly report, the Organization of the Petroleum Exporting Countries said the cartel’s July production rose 0.5% from June to 32.9 million barrels a day. That was mostly due to Libya and
Nigeria, the two suppliers exempt from the ongoing production-curtailment pact. The growth, though slower than previous months, still stoked concerns that the deal isn’t producing the anticipated results.
Even Saudi Arabia, the de-facto head of OPEC, exceeded its output cap last month. However, the kingdom said its high production was to meet peak summer demand domestically. Moreover, Saudi Arabia committed to cut its exports again in September in an effort to bolster market sentiment.
In the U.S., the looming end of the summer driving season is raising demand concerns. “Investors are starting to factor in a reversal of the recent fall” in U.S. crude stockpiles, said ANZ Research.
One bullish aspect of OPEC’s report Thursday was its upward projection regarding 2018 global oil demand. The cartel also believes production growth from rival suppliers will slowly peter out next year.
“We’ll wait for Friday’s International Energy Agency forecast...but OPEC’s assessment is consistent with a third-quarter deficit on the order of 500,000 barrels a day,” said Tim Evans, a Citi Futures analyst.
In the US, Cracks are showing in what has been a virtually non-stop U.S. equity rally after a rapid escalation of tension between North Korea and the United States this week.
Market analysts expect that the pullback in stocks due to the increasingly aggressive tone in exchanges between Washington and Pyongyang will continue, although investors hope that the selling will not escalate to a correction - a decline of 10 percent or more.
The benchmark S&P 500 index tumbled more than 1 percent on Thursday, only the third time this year it has fallen that much, while the NASDAQ shed more than 2 percent.
The S&P is trading near its most expensive valuation level since 2004, as measured by the price-to-12-month forward earnings ratio.
U.S. stocks have risen week after week this year - with the S&P up more than 9 percent - in extremely low volatility, as strong corporate earnings and an improving global economy offset disappointment that U.S. President Donald Trump's promises to lower corporate taxes and implement a massive infrastructure spending have so far failed to see the light of day.
Until this week, the equity market had managed to shake off negative news, including previous saber-rattling over North Korea and failures in Washington to pass high-profile bills, such as repealing and replacing Obamacare.
But although U.S. equities on Wednesday managed to close only slightly down even after Trump's warning that "fire and fury" would rain on North Korea, on Thursday the chickens came home to roost on Wall Street.
More than 430 stocks from all U.S. exchanges hit their lowest levels in 52 weeks or more on Thursday, the most for any session since mid-November right after Trump was elected. The average for new 52-week lows this year is about 230 per day.
"The easy money has already been made," said Joel Kulina, senior vice president of institutional cash equities at Wedbush Securities in New York. "I’m looking selectively at the pullbacks, but my gut is that we could be in for a bumpy ride for the next couple of months or so."
Many market participants have been calling for a significant decline on the S&P 500.
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