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Why the US stock slump is hitting global markets hard

A sharp drop in US stocks is causing tremors thousands of miles away in Asia and Europe.Major share i...

Posted: Oct 11, 2018 12:42 PM
Updated: Oct 11, 2018 12:42 PM

A sharp drop in US stocks is causing tremors thousands of miles away in Asia and Europe.

Major share indexes in the United Kingdom, Germany and France fell more than 1% in early trading, following Wednesday's bloodbath in American markets, where the Dow plunged 3.2%.

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The steepest losses in global stocks were in Asia, where some regional markets were already struggling. Stocks in Shanghai and Hong Kong entered bear market territory earlier this year.

Shanghai and Tokyo closed down 5.2% and almost 4%, respectively, on Thursday. Hong Kong's market dropped over 3.5%.

The US sell-off delivered a fresh hit to the confidence of Asia investors, said Jingyi Pan, a strategist at trading firm IG Markets.

Investors are very pessimistic about the Chinese market, which is being buffeted by the country's economic slowdown and the trade war with the United States, said Hao Hong, head of research at investment bank Bocom International.

Chinese tech stocks suffer

Just like in the United States, tech stocks were among the biggest losers. Chinese social media and gaming company Tencent (TCEHY) sank almost 6% on Thursday, while smartphone maker Xiaomi plummeted more than 8%.

Share prices in Asia are getting hurt by the recent rise in yields on US Treasury bonds, which are now near a seven-year high. Stocks tend to slump after sharp spikes in yields because that makes bonds, which are seen as safer assets, more appealing. Asian stocks are particularly vulnerable, since they're viewed by traders as riskier than US ones.

Higher borrowing costs also squeeze company profits.

Tech stocks are particularly vulnerable because they are among the most highly valued parts of the stock market, according to metrics widely used by investors. When investors get nervous, they are more likely to offload tech companies and move into assets that are seen as less risky, such as utility firms.

Hong Kong's market often reacts to movements in US Treasury yields because the Chinese territory, whose currency is pegged to the dollar, follows the US Federal Reserve's monetary policy, Hong said.

European fears

Shares in automakers were among the hardest hit in Europe. Fiat Chrysler (FCAU) and Volkswagen (VLKPF) both shed over 3% in early trade, while Daimler (DDAIF) dropped 2.6%.

Banks in the region also suffered shares price declines, with Santander (SAN) and HSBC (HSBC) each giving up more than 2%.

Kit Juckes, a strategist at Societe Generale, said that investors were paying more attention to local events in Europe, where Brexit and rising political risks in Italy have been front of mind.

In Germany, where exports drive the economy, intensifying global trade conflicts have been reflected in stocks. The benchmark Dax entered correction territory in February.

Carmakers such as BMW (BAMXF) have been slammed by the trade war with China.

What comes next

Investors have other reasons to fret, including a potential slowdown in global economic growth, the strengthening dollar and the next phase of the global trade war.

Money manager Fidelity argues that Asian stocks are still "compelling" for investors because stocks are generally cheaper there than in the United States. They could rise in the long term as Asia becomes wealthier.

"The long-term fundamental story for Asia led by rising domestic consumption remains unchanged," said Medha Samant, investment director for Asian equities at Fidelity International.

Juckes argued that US markets were playing catch up to trends that have already affected global currencies and emerging markets.

"For much of 2018, the US economy has been oblivious to a turn in the global economic cycle," he said. "This week has seen the S&P, and the Nasdaq, sit up and pay attention to what's going on."

Mississippi Coronavirus Cases

Data is updated nightly.

Cases: 517138

Reported Deaths: 10306
CountyCasesDeaths
Harrison35086559
DeSoto33512432
Hinds32826644
Jackson24938392
Rankin22621405
Lee16564245
Madison14986283
Jones14195248
Forrest13865260
Lauderdale12343323
Lowndes11401193
Lamar10715140
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Hancock7854132
Washington7562169
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Monroe7106179
Pontotoc7071110
Warren6915179
Panola6815136
Neshoba6762210
Marshall6751142
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Union647099
Alcorn5969108
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George511380
Prentiss511086
Tippah498483
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Scott479599
Tate4790118
Adams4789125
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Copiah458995
Simpson4587117
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Wayne444372
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Clay314378
Clarke302095
Calhoun289550
Holmes273789
Smith271452
Yalobusha246547
Tallahatchie233153
Greene225549
Walthall222266
Lawrence221142
Perry214656
Amite210657
Webster207248
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Carroll176341
Jefferson Davis175043
Tunica164139
Benton153539
Kemper145641
Choctaw138027
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Humphreys132639
Franklin127130
Quitman107928
Wilkinson106539
Jefferson97334
Sharkey65321
Issaquena1957
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Alabama Coronavirus Cases

Cases: 849409

Reported Deaths: 16199
CountyCasesDeaths
Jefferson1165042004
Mobile744951384
Madison53605739
Shelby38474373
Baldwin38236590
Tuscaloosa36225644
Montgomery34599784
Lee25712264
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DeKalb13099271
Walker12202380
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Coffee9447192
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Chilton7101171
Covington6985197
Escambia6972146
Franklin6379108
Chambers5815142
Marion5451132
Dallas5307210
Pike5135109
Clarke485986
Lawrence4857130
Winston4804111
Geneva4658137
Bibb436795
Barbour370880
Butler3446101
Marengo342593
Monroe338666
Randolph338567
Pickens335590
Fayette332785
Henry321566
Cherokee321264
Hale320289
Crenshaw262278
Washington256952
Cleburne255460
Lamar253755
Clay253169
Macon246667
Conecuh193962
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Perry141940
Sumter139841
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