Equity market losses were seen across Europe and Asia on Tuesday, taking their lead from weak US stocks overnight as concerns mounted that the market was becoming vulnerable to a correction.
After the S&P 500 lost nearly 0.7% overnight, the Nikkei 225 in Tokyo shed 1.43% in Asian trade, while the EuroStoxx 50 was down 0.3% after an hour's trade in Europe.
Fundamentals remain supportive
While the factors that have spurred stock markets over the past year, such as robust economic growth, corporate earnings and tight labour markets, remain supportive - fears of an equity market correction have begun to emerge as benchmark bond yields have begun to rise.
The global rally in equities has come as investors raised their risk profiles - increasing their portfolio allocations of riskier equities at the expense of safer assets such as government bonds.
Rising bond yields
Bond yields have an adverse relationship with bond prices - as prices fall when they are sold off, yields rise, and vice versa.
"The rise in global bond yields isn’t necessarily a bad thing - it reflects the strength of the economic recovery," said Hussein Sayed at FXTM.
"However, the pace of the rise in yields may create significant headwinds for equities in the days to come, especially if US 10-year yields break above 3%, a very critical physiological level.
"A simple question that may come to investors minds, is 'why would I remain in equities when two-year US treasury bills can provide the same divided yield return of the S&P 500 at 2.12?'."
Tuesday's drop in global equity markets may yet just turn out be another round of profit taking before the next significant move higher. After all, the corporate data has been supportive.
FactSet figures show that during the most recent round of corporate earnings reporting, so far more than three quarters of S&P 500 companies have reported positive earnings surprises, while 81% have reported positive sales surprises - the latter a record level.
Concerns remain, however, that bubbles are forming and corrections will follow - a correction is when an asset price falls by 10% from its most recent peak.
Peter Garnry, head of equity strategy at Saxo Bank, said: "Equities might be at record highs, with sentiment overextended on nearly all fronts, but this does not necessarily point to a bubble.
"It does, however, mean that a correction is likely and investors should be watching price action for signs of super-exponential growth, as well as central bank policy and of course inflation."
Timing wise, an equity market correction is more than overdue. Fairly frequent event, they happen on average about once a year: the S&P 500 last encountered a correction during December 2015 to January 2016.
In Asia, the Nikkei ended down 1.43% at 23,291, China's Shanghai Composite fell 1% to 3,488.01, while Seoul's Kospi Composite lost 1.17% to 2,567.74.
In Europe, the losses were less severe. London's FTSE 100 slid 0.4% to 7,641.5, while Frankfurt's Xetra Dax eased 0.13% to 13,305 and the CAC 40 in Paris lost 0.1% to 5,518,5.