North American markets plunged at the start of trading this morning.
Earlier, U.S. index futures had signalled losses will cascade in the world's biggest stock market as contracts on the major equity indexes hit their daily loss limits of 5 per cent.
In a broad selloff spanning all industries, stocks including Apple Inc. and Netflix Inc. slid at least 6 percent, while slumps in Gilead Sciences Inc. and Biogen Inc. indicated a selloff in biotechnology shares won't abate. ConocoPhillips and Chevron Corp. lost more than 8.4 percent as crude fell further.
"GDP growth in the U.S. and euro zone economies just isn't strong enough to prevent a global disinflationary shock from accumulating," Thomas Thygesen, SEB's head of cross-asset strategy, said by phone from Copenhagen. "People have realized there could be further weakness in the Chinese currency. They don't seem in control of the situation and we could see feedback loops that haunt the U.S."
Calm in the U.S. market shattered last week, with volatility soaring by the most on record as the Dow entered a correction and investors dumped the biggest winners of 2015. A gauge of volatility expectations more than doubled last week. Shares succumbed to a global selloff that's wiped more than $5 trillion off the value of equities around the world since China's shock currency devaluation on Aug. 11.
Moreover, speculation had been building all year for the Federal Reserve to raise interest rates in September for the first time since 2006, following the end of quantitative easing in 2014.
Traders are now pricing in less than a one-in-three chance the central bank will act next month, from about 48 percent just before the yuan devaluation, as the rout in equity markets has shaken confidence that the global economy will be strong enough to withstand higher U.S. rates.
"The chickens are coming home to roost," Thygesen said. "We've been too hopeful that Fed tapering didn't matter, that they could hike interest rates and we'd still have a healthy economy. Since the Fed stopped bond purchases, they've been choking the life out of global manufacturing and that matters most for commodities and emerging markets."
The S&P 500 is down 7.5 percent from its last record in May, and on track for its worst August decline in 14 years. It sank the most since 2011 on Friday amid signs China's economy is weakening. A gauge of volatility expectations more than doubled last week.
Despite the selloff, the benchmark index has avoided the corrections and bear markets afflicting stocks from Sao Paulo to Shanghai. It was only Friday that the S&P 500 capped its single 5 percent decline of the year, spending the previous seven months locked in a trading range that had no precedent in a century of market history.
The retreat in global stock markets bears resemblances to losses that hit equities in 1998, when financial stress from Asia to Russia sent the S&P 500 down 19 percent, only to recover in three months, said Laszlo Birinyi, the president of Birinyi Associates in Westport, Connecticut.
"I wouldn't expect a mirror image but my point is that for all the negative things I've read this weekend, almost all of these have been comments by people who were bearish to begin with," Birinyi said Monday in an interview on Bloomberg Radio. "This is a short term painful correction but when you have a situation where the market is well aware of the issues, the market has ability to correct."
With files from Bloomberg
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