S&P 500 slides into bear market territory
Broader US stock index ends more than 20% below previous peak on intraday basis
The broader US stockmarket index slid into a bear market on Monday as investors reacted negatively to US Treasury secretary Steven Mnuchin’s highly unusual effort to reassure investors about Wall Street banks’ liquidity.
The S&P 500 finished the holiday-shortened day down 2.7 per cent at 2,351, or more than 20 per cent below its previous intraday peak in September. It marks the worst Christmas Eve trading day on record.
Mr Mnuchin’s attempt to buoy confidence was also undercut by President Donald Trump’s continued assault on the Federal Reserve, further playing on investor jitters.
“When you have the market already worried about where we are in the cycle, incremental political instability on top of that is pretty difficult for the market to digest,” said Greg Boutle, head of US equity and derivatives strategy at BNP Paribas.
The half-day of trading on Wall Street saw the Dow Jones Industrial Average drop 2.9 per cent to 21,792, while the tech-heavy Nasdaq Composite, already in bear market territory, lost another 2.2 per cent to 6,193. The political tensions surrounding the continued US government shutdown since Friday night also weighed on the dollar, down 0.5 per cent against a basket of other currencies.
Mr Mnuchin’s said on Sunday that the chiefs of the country’s biggest banks had confirmed to him that they had “ample liquidity for lending to consumer, business markets, and all other market operations” — a matter that had not been a widespread point of concern.
Mr Mnuchin also convened a call on Monday with the President’s Working Group on Financial Markets, which includes Fed governors, along with regulators from the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Federal Deposit Insurance Corporation.
One person familiar with the conference call said it was a “check-in call” that discussed the functions of different agencies during the federal government shutdown. Some Treasury functions are also affected by the shutdown.
Mr Mnuchin’s statement on the weekend appeared to be an attempt by the administration to calm nerves after a volatile week for traders, and dispel media reports that President Donald Trump was contemplating firing Jay Powell, Federal Reserve chairman.
But Mr Trump did not aid that effort as he continued his assault on the Fed on Monday morning from Washington, DC, where he remains through the holiday week due to the shutdown.
“The only problem our economy has is the Fed. They don’t have a feel for the Market, they don’t understand necessary Trade Wars or Strong Dollars or even Democrat Shutdowns over Borders. The Fed is like a powerful golfer who can’t score because he has no touch — he can’t putt!” Mr Trump tweeted on Monday.
Win Thin, global head of currency strategy at Brown Brothers Harriman, warned that among traders, “sentiment is so negative right now that markets will assume the worst” about any suggestion that Mr Trump could seek to remove Mr Powell.
“Until this weekend, markets were not that concerned about liquidity or clearance issues,” Mr Thin said. “At best, Mnuchin made a rookie policy mistake in trying to reassure markets; at worst, Mnuchin knows something that the markets don’t.”
European markets also appeared to respond to the uncertainty — the FTSE 100 closed down 0.5 per cent in thin pre-Christmas trading on Monday, with the pan-European Stoxx 50 closing down 0.9 per cent.
Brent crude fell 1.8 per cent to $52.86, it’s lowest level in 16 months.
In Asia, equity trading was muted, with markets in Japan shut for a holiday and many others closing early for Christmas.
China’s CSI 300 ended the day up 0.3 per cent and Hong Kong’s Hang Seng index finished a shortened session down 0.4 per cent. In Australia the S&P/ASX 200 rose 0.5 per cent while South Korea’s Kospi Composite slipped 0.2 per cent.
The accelerating sell-off into the equity market close prompted a move lower for US Treasury yields. The 10-year yield dropped 6 basis points from Friday’s close to 2.73 per cent, it’s lowest level since April.