The Euphoria Didn’t Even Last Two Days: US Stock Exchange Gripped by Financial Panic
NEW YORK – December 5, 2018
At the G20 summit in Buenos Aires, the President Trump and Chinese President XI Jinping agreed to suspend the trade war for ninety days. However, the positive mood in the market did not last long. It took only 2 days for the US stock indices to fall by more than 3%.
In particular, the high-tech Nasdaq lost 3.8%, the Dow Jones just over 3%, and the S&P 500 broad market index collapsed by 3.25%.
The vast majority of shares were in the red zone, and the leaders of the decline were high-tech giants. Amazon collapsed by almost 6%, Apple by 4.5%, Google by almost 5%, and Netflix by more than 5%.
Thus, not only was the rapid growth of the beginning of this week caused by the trade truce between the US and China nullified, but also the growth of the end of last week. Market players turned their attention to other factors.
In particular, they drew attention to the inversion of the yield curve which is an important precursor to the crisis. The last time it happened was in 2007, shortly before the collapse of the Bank Lehman Brothers. Strong sales were also observed in the shares of the banking sector. Systemically significant global banks are trading a third below their annual highs.
The collapse of yields on the treasuries is a consequence of the revaluation of market expectations. In addition, traders have to close previously opened short positions, which only strengthens the current movement.
Investors’ confidence about the interest rate hike was shattered not only in the US. Debt and money market traders around the world are revising the pace of tightening amid signs of global growth stalling.
Traders looked with both mistrust and fear at the Fed's intentions to tighten its monetary policy in 2019 even before Chairman Jerome Powell's comments that left room for a potential pause next year. The minutes of the Fed's November meeting also paved the way for greater flexibility. At the same time, the long-awaited increase in the rate of the European Central Bank seems less likely, and the possibility of a similar step in Australia is constantly postponed.
Central banks may have good reasons to move in the direction of "pigeon" policy. The International Monetary Fund lowered its global growth forecast last month and warned this week that prospects could further deteriorate. This is reflected in increased turbulence in the financial market: Shares are falling in the fourth quarter and credit spreads are expanding. Meanwhile, falling oil prices are holding back inflation expectations.