Neil DennisThe Dow Jones Industrial Average suffered its worst one-day loss in more than six years overnight, prompting heavy losses across Asia and Europe on Tuesday.
While some debate remained about the catalyst for the losses, which began last week, few doubted that a stock market correction was now well under way as the Dow's cumulative losses in the past week exceeded 8%.
A correction occurs when an asset, security or other pricing mechanism such as a stock index falls more than 10% from its most recent cyclical peak.
Volumes high
The correction took on added significance on Monday, however, after losses in the US were among the sharpest seen since the global financial crisis, with the Dow - at one point - shedding nearly 800 points in just 10 minutes.
Trading volume was the second-highest seen this decade, suggesting positions were being unwound across the board and at a frantic pace.
The Dow fell 4.6%, or 1,175.21 points to 24,345.75 - its largest points fall ever, and its largest percentage fall since August 2011 when the US lost its AAA credit rating. The S&P 500 lost 4.1% to 2,648.94, also its largest fall since August 2011. The Nasdaq Composite shed 3.78% to 6,967.53.
In Asia, the Nikkei 225 Average in Japan dumped 4.76% to 21,603.5, while Australia's S&P/ASX 200 slid 3.2% to 5,833,3. In late trade in Hong Kong, the Hang Seng index was down 4.35% at 30,815.
In the first moments of European trade, the EuroStoxx 50 index fell 3.21% to 3,367.5. London's FTSE 100 lost 3.1% to 7,108.5, while the CAC 40 in Paris and Frankfurt's Xetra Dax both opened 3.5% lower.
Inflation threat
Many analysts have declared that because stocks and bond markets have trailed lower together, they are both responding to the threat of higher inflation - the catalyst for this being purchasing manager surveys and last Friday's US jobs report, showing robust levels of employment and wage growth.
Hussein Sayed, strategist at FXTM, said: "While inflation remained absent, investors had more reasons to take risks given the low borrowing costs companies were enjoying. Now with inflation indicators heading north, the Federal Reserve is expected to move more aggressively than previously thought."
On Tuesday, however, flows were beginning to find their way back into benchmark government bonds as investors looked for havens in which to park their funds until the equity markets found support.
Bond yields dip as havens sought
The yield on the 10-year Treasury bond, which in the previous couple of weeks put on more than 10 basis points, fell nearly 2 bps in Asian trade on Tuesday to 2.65% as investors bought back into bonds. Yields move inversely to prices - so as investors sell bonds, yields rise, and vice versa.
"While we have been waiting for a correction in stocks for some time, we don't expect the rout to continue," said Ian Shepherdson at Pantheon Macroeconomics.
He added: "The fall in the S&P 500 was startling, but it merely returned the index to its early December level - it has given up the gains only of the past nine weeks.
More significantly, he said: "The underlying upward trend has not been breached, as the chart (below) shows."
Chart courtesy of Pantheon Macroeconomics