Some traders and investors are seeing the recent surge in stocks as a sure sign of an uptick. But stock valuation is more complex than that, writes Brian Milner.Richard Drew/AP
After a fairly ho-hum response to ugly events in Europe earlier on Wednesday, things are turning nasty now. With a little more than an hour left in the trading day, the Dow Jones industrial average was down 373 points or 3.1 per cent. The S&P 500 was down 43 points or 3.4 per cent.
There are plenty of other indications that investor anxiety is on the rise. The CBOE Volatility index, or VIX (the so-called fear gauge), is also starting to reflect more concern, surging above 36 – a gain of more than 12 per cent in less than two hours. Meanwhile, investors are charging into U.S. government bonds again, sending the yield on the 10-year U.S. Treasury bond to 1.96 per cent and marking its lowest level in about a month.
Where is the fear coming from? We noted earlier that some observers have been wondering about the stock market and its apparent lack of concern for what is going on in Europe, even as rising Italian bond yields signal big trouble ahead for the world's eighth largest economy.
As for what is behind the afternoon dip, though, Bloomberg News is reporting (via Handelsblatt) that Germany's ruling party wants to make it possible for European nations to exit the euro area without losing membership in the union – feeding concerns that the euro, as a common currency, is doomed. Its demise could create tremendous financial uncertainty.
As for what's leading the selloff in North America, U.S. financials are the biggest drags on the S&P 500, slumping 4.6 per cent. Commodity producers are also faring poorly, with U.S. energy stocks down 3.7 per cent and materials down 4.4 per cent.
In Canada, where the S&P/TSX composite index is down 2.1 per cent, commodity producers led the selloff. Energy stocks fell 2.8 per cent and materials fell 2.1 per cent. Gold isn't providing much of a haven: It was recently trading at $1,774 (U.S.) an ounce, down $12.
David Berman