Global stock markets suffered a domino effect of sell-offs today after a heavy day of losses on Wall Street yesterday, with the Dow Jones losing 800 points to record its worst day in eight months.
The price of gold rose 2.35% in response, from yesterday’s lows of £899.14 per ounce to a high of £924.27 today; an impressive figure considering the slight improvement in the value of the Pound Sterling would normally lower the price of gold.
In Asia, stock markets hit a 19-month low point, with the Nikkei dropping by 3.9%, the Shanghai Composite falling by 4.9%, and the Hang Seng losing 3.5% by the end of the day’s trading.
Good morning Europe! While you were asleep, Asian stocks got mashed pic.twitter.com/M7QO2quXEX— Mike Bird (@Birdyword) October 11, 2018
Today hasn’t been any better for the Asian markets, with Chinese stocks at their lowest since early 2016, and their suffering was carried on into the European markets, with the FTSE 100 opening down 1.6% at 7,030 points this morning.
Europe has the added difficulty of accounting for the ongoing dispute over the Italian budget, with the coalition government of Italy and the European Central Bank disagreeing on how much debt Italy should be repaying annually, and fears that Italy might default like Greece did, or walk away from the Euro in protest.
The market’s rush to sell isn’t down to just Italy causing problems though. The US stock markets have enjoyed a record bull run of over nine years – longer than that of the Dot Com bubble. Experts have been warning for some time that there would be a big fall, whether as a correction or more of a freefall. FANG stocks, that is to say the popular tech stocks like Facebook and Netflix, have been at the heart of the rise in stock prices and now the heart of the falls, with Netflix losing 8.5% share value today.
The big risk causing the selling is American debt. The US Government owes trillions, and with interest rates rising the cost of repaying the debts is increasing. As investors become more wary, they back out of buying the safe government bonds because they fear the US government won’t be able to honour the agreement to repay them in the future. This causes the Treasury to cheapen the bonds for buyers, thus increasing their yield. As we reported earlier this week, the US Treasury Bond yields were up for 2-year, 10-year and 30-year bonds – a sign that investors are very cautious of backing the US Government, despite the strong economy currently.
It is this debt concern that has rattled President Trump’s cage, resulting in repeated criticism of the Federal Reserve. This is an uncommon approach given the Fed’s impartial nature, but Trump has been careful to target Jerome Powell, the Chair of the Fed, more than the group itself to not seem like he’s pressuring the group into making decisions based on his administration’s wishes.
Michael Hewson of CMC Markets told the BBC News today that it was "too simplistic just to blame the Federal Reserve" for market turmoil, while The Guardian reported criticism from Hussein Sayed, chief market strategist at FXTM, who said: “His actions helped building inflationary pressures and the Fed cannot stand still when it sees the economy overheating.”
The President isn’t entirely wrong though. Charles Ripley, senior strategist at Allianz Investment Management, commented that the market’s rush to sell WAS primarily down to the higher interest rates, saying: “Higher interest rates typically bring on tighter financial conditions which could dampen growth going forward and equity markets are reacting to that.”
The head of the IMF, Christine Lagarde, has been saying for a while that market valuations have been "extremely high", and she also came out in defence of Jerome Powell – the head of the Federal Reserve under fire from President Trump.
Speaking to CNBC at the International Monetary Fund’s meeting in Bali, Lagarde said it was “legitimate and necessary” for interest rates to be raised by the Federal Reserve.
"I would not associate Jay Powell with craziness.” - IMF chief Christine Lagarde defends the Fed after President Trump said the central bank had "gone crazy." https://t.co/j222raispr pic.twitter.com/WoBqGtp6N4— CNBC International (@CNBCi) October 11, 2018
There was some respite today in the form of US jobless claims rising and a less than expected inflation rate, but this was nothing in the face of the large market upheaval.
Gold is currently £921 per ounce, having fallen back slightly from the day’s peak, though continued sell-offs overnight in the US and Asia could result in a similar day tomorrow.