Global financial markets swooned as Italy’s bond market staggered into perilous territory Wednesday, re-awakening investor fears that had sat dormant for much of the past month.
The rapid selloff in Italian bonds sent ripples throughout other financial markets, as investors sold off stocks, commodities and currencies and sought refuge in the traditionally stable and highly liquid U.S. bond market.
Toronto’s S&P/TSX composite index plunged 332.63 points or 2.7 per cent – its worst drop in more than a month – to 12,156.22, in a broad-based selloff that saw 95 per cent of the stocks on the index post declines.
The carnage was worse on the U.S.’s S&P 500 index, which slid 3.7 per cent – its worst loss since mid-August – and saw just one of its 500 stocks close higher.
The Canadian dollar lost 1.5 cents to its U.S. counterpart, ending the day at 97.61 cents (U.S.), as investors raced to U.S.-denominated holdings.
Gold, the traditional investor haven, wasn’t spared, as futures fell $7.60 to $1,791.60 an ounce on the New York Mercantile Exchange. Italian bond yields surged past 7 per cent, a level viewed by many as a danger zone.
“The 7-per-cent threshold was psychologically significant,” said Colin Stewart, head of hedge fund manager JC Clark Ltd. “There’s a tug-of-war between people who think North American conditions are not so bad … and the uncertainty coming from Europe. [On Wednesday] Europe won out.”
A key trigger to the selloff, market watchers said, was a decision by the London-based clearing house that handles Italian bonds, LCH:Clearnet, to increase the margin requirement for holders of the Italian debt. The move forced many leveraged holders of government debt to liquidate other assets in order to cover the increased margin requirements, putting downward pressure on stocks and other assets.
For stocks, the selling snowballed shortly after the North American opening bell, when the S&P 500 fell below its 200-day moving average of 1,273, a critical technical trading level. That triggered widespread “stop-loss” selling by computerized trading systems set up to automatically sell once the 200-day average was breached, fuelling the day’s deep losses.
“There were a whole bunch of mechanical things going on,” said Robert McWhirter, president of hedge fund company Selective Asset Management Inc.
Murray Belzberg, CEO at Perennial Asset Management, suggested that investors had blinders on when they jumped back into the stock market with both feet last month, encouraged by some improving economic numbers and cheap stock valuations. That left markets susceptible to sharp drops once the reality of the high-risk, low-economic growth environment hit home again.
“We’ve been positioning for this for the past month,” he said. “Our general view is negative. The solutions they’ve been offering [for Europe]aren’t really solutions.”
“When you get a day like this, after [the gains]we’ve had the past few weeks, it scares people,” said Mr. Stewart of JC Clark. “They wonder if we’re going back to the way things were in September.”