Equities sell-off: European investors see buying opportunities

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Equities sell-off: European investors see buying opportunities

Global stock markets opened in the red after sell off’s on Wall Street sparked panic among investors in Asia. While European stock markets opened negative, value investors caught on to buying opportunities.

Jerome Powell had a challenging first day at his new job as chair of the US Federal reserve, as US stock markets reported the biggest losses since the flash crash in August 2015. While the previous crash originated in Asia and caused a 5% slide of the S&P500 within minutes, indices recovered on the same day.

In contrast, US stock market indices reported drastic losses by the end of trading on Monday evening, the S&P 500 closed at -4.1%, the Dow Jones industrial average dropped by 4.6% and the Nasdaq fell by 3.8%.

The panic mood spread to Asian stock markets, with the Nikkei slipping by more than 7% but gradually recovering by the end of its trading day to -4.7%.

European stock markets already reported heavy losses on Monday, and opened in the red on Tuesday morning with both the DAX30 and the FTSE100 opening 3.5% lower. Online trading firm IG predicts that the DAX30, IBEX and CAC40 will report losses of more than 4%.

According to Carsten Mumm, head of Capital Market Analysis and chief economist at German Donner & Reuschel, the current sell-off is rooted in growing fears of a rate hike in the US. “Returns on German Bunds with a ten year maturity temporarily rose to 0.77%, their US equivalent to 3.00% per year, rendering this risk free alternative to equity markets increasingly attractive. This in turn undermines the main reason for equity investments over the past years.” While Mumm acknowledges that the gobal stock market sell-off could escalate, he also stresses that a rise in bond yields would initially be an indicator for economic recovery and therefore a good sign.

Peter Garnry, head of Equity Strategy at Saxo Bank adds: “The low volatility regime is likely dead – 2017 and early 2018 were a crazy anomaly. So far the blow up is scary but has been relatively contained. This is the largest two-day selloff since the flash crash of August 2015. A 12% top-to-bottom move in S&P 500 futures is likely the product of a chain reaction that started last Friday when unexpectedly strong US wage growth figures pushed US rates higher. S&P 500 futures are now up 2.6% from their lows.”

For Tobias Basse, analyst at Nord / LB, the sell off demonstrates that the US continues to be the centre of global financial markets. “The current dizzy spell across European stock markets is clearly a result of the correction in the US” he stresses. For some European investors, the sell off might well represent a buying opportunity, he argues.

“The most likely scenario in our view is the return of bargain hunters who were recently forced to stand on the sidelines as stock market indices were on a sustained upwards trajectory. These investors will now go out and hunt for winter sale bargains. This scenario appears likely considering that dividend returns for the S&P 500 based on 2018 cost forecasts are expected to be at 2%, bringing them close to parity with 2YUS bond yields” Basse said.

Emiel van den Heiligenberg, Head of Asset Allocation at Legal & General Asset Management adds: “In our view, the situation is analogous to the so-called Taper Tantrum of 2013, when bond markets led a broader sell-off following a suggestion by the US Federal Reserve (Fed) that it might scale back its asset purchases. That episode ultimately proved a buying opportunity for the asset classes hardest hit.”

At the time of writing, European stock markets appeared to bound back, with the DAX30 round -2.2% by 11:30 CET, the CAC40 at -1.7% and the FTSE100 at -1.89%.