February 5, 2018 / 8:50 PM / 6 months ago

Instant View: U.S. stock market crumbles, Dow erases 2018 gains

(Reuters) - U.S. stocks plunged in highly volatile trading on Monday, with the Dow industrials falling nearly 1,600 points at its lows - the biggest intraday point drop in history - as a long-awaited pullback from record highs deepened.

A trader watches his screens on the floor of the New York Stock Exchange in New York, U.S., February 5, 2018. REUTERS/Brendan McDermid

Investors grappled with rising bond yields and signs that inflation is firming have raised some traders’ expectations that the Federal Reserve may hike interest rates four times this year. Fed officials have indicated that three rate hikes are likely.

The Dow Jones Industrial Average .DJI fell 1,175.21 points, or 4.6 percent, to 24,345.75, the S&P 500 .SPX lost 113.17 points, or 4.10 percent, to 2,648.96 and the Nasdaq Composite .IXIC dropped 273.42 points, or 3.78 percent, to 6,967.53.

COMMENTS:

JACK ABLIN, CHIEF INVESTMENT OFFICER, CRESSET WEALTH ADVISORS, CHICAGO.

“One thing is that going into the last week or so, investor bullishness was in the top decile of its historical range, which suggests that investors were pretty optimistic, with high expectations and largely complacent. There’s kind of an emotional reversal that’s going on.”

“I also think that perhaps this did coincide with the transition of Fed chairs from Janet Yellen to Jerome Powell. Investors don’t know much about Powell, where we did really know a lot about Yellen before she took her role.”

GREG ADAMSICK, DIRECTOR OF GLOBAL FUTURES AND OPTIONS, RCM ALTERNATIVES, CHICAGO

“Equities had had such a muted reaction to higher yields. We reached a point that yields reached high enough that stocks look vulnerable. When S&P 500 broke 2,700, a lot of sell orders were activated. You have a lot of index exposure through passive investing with ETFs. Once the indexes get hit, selling follows.”

JOE SALUZZI, CO-MANAGER OF TRADING, THEMIS TRADING, CHATHAM, NEW JERSEY:

    “It looks to me like a typical type of scenario when you see a single stock flash crash where you’ll see bids just disappear, stop orders get kicked, in those particular names. The overall market could have taken a cue from some of the bigger names. There was also heavy futures activity at the time as well.”

    “It’s tough to blame any particular person or event but it tells you the type of structure we have now certainly can’t handle this type of volatility and volume still.”

    “I think there’s still going to be pressure. There’s going to be more. But then I think we’re going to firm up. People will realize that the event we’ve been waiting for is now over. But the event has to get itself out of the way first.”

STEVE WACHTEL, PORTFOLIO MANAGER, SSI INVESTMENT MANAGEMENT, LOS ANGELES

“Sharper sell-off than we expected but it’s technical based with mostly the machines selling.  Seemed like there was a minor flash crash there around noon.  We look at the credit markets  closely when there is a large equity sell-off and the credit markets are still very healthy, just moderate spread widening today.”

NAEEM ASLAM, CHIEF MARKET ANALYST, THINKMARKETS, LONDON

“I have a strong feeling that this selloff is going to intensify because bears are seeing blood on the Street and all they want is right in front of them.”

LARRY MILSTEIN, HEAD OF GOVERNMENT AND AGENCY TRADING, R.W. PRESSPRICH & CO., NEW YORK

“We had a nice bounce from the lows there. It’s unsettled where we go from here at this point. Some technical levels were hit in the equity market where selling beget more selling. It was probably some ‘blackbox,’ algo selling in stocks and buying in bonds.

DENNIS DICK, PROPRIETARY TRADER, BRIGHT TRADING LLC, LAS VEGAS 

“You’ve got to be prepared for all types of markets, and a lot of people who have been in this market for the past three or four years have never seen this before.”

“People who have been buying the dip are now going to be selling the rip. The psychology of the market changed today. It’ll take a while to get that psychology back.”

JEFFREY KLEINTOP, CHIEF GLOBAL INVESTMENT STRATEGIST, CHARLES SCHWAB & CO, BOSTON

    “I certainly don’t see anything fundamental. It wasn’t driven by any macro event, rather it appears to be computer driven trading that led to an order imbalance. These things can happen quickly and tend to be corrected quickly.

    “Last week we saw a broad pullback that was macro related. Instead of being tied to fears of economic weakness it was tied to too much growth and fears of inflation. Certainly fears that the Fed in the U.S. might get more aggressive in reigning in stimulus. But as long as growth remains intact, and we believe it will, stocks should rebound.”

LOU BRIEN, MARKET STRATEGIST, DRW TRADING, CHICAGO

“The velocity of the market selloff picked up. For the first couple of days of it there hadn’t been much of a reaction in the long-end of the treasuries. Usually during a selloff there will be some kind of reaction. The magnitude of the selloff versus how far it’s come really didn’t raise any alarm bells in the stocks until the velocity picked up this afternoon.

“Partly, I think the argument could be made too that the heightened inflation expectations from the tax bill and from infrastructure output, and then you had that very misleading wage number the other day, all fed into inflation expectations and it wasn’t that the Fed was going to raise rates to much it was that they weren’t going to be quick enough.”

MICHAEL O’ROURKE, CHIEF MARKET STRATEGIST, JONESTRADING, GREENWICH, CONNECTICUT

“People who were not active, who tend to be in index products were looking to take profits today. They don’t price until the end of the day. They probably put orders in to sell and book some profits.”

“These orders have to be done by the end of the day. You want to make sure you get them done.”

MARKETS:

BONDS: The 2- Treasury note yield eased to 2.0767 percent, while the 10-year bond yield rose to 2.8850, the highest since January 2014, before falling back to 2.7657.

FOREX: The dollar index was up 0.33 percent.

VIX: The Cboe volatility index more than doubled to 35.73, its highest since August 2015 and was last up 14.84 at 32.15.

Americas Economics and Markets Desk; +1-646 223-6300

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