For a market that has enjoyed steady gains and fairly low volatility over the course of the past two years the steepness of the falls speaks to a complacency that has been prevalent for a while now and which appears to have been shattered in the wake of a surge in volatility.
How this plays out over the coming days depends on whether the rebound we saw on Friday can translate into some form of base for a continuation of the uptrend that has been in place for the last nine years. This may well depend on whether we see further increases in bond yields, or a rise in interest rate expectations from other central banks around the world.
..There are other concerns, US margin debt still remains near record levels and the prospect of further losses, combined with the prospect of higher rates could prompt further jitters, not to mention the untried reaction function of a whole new breed of equity investors and traders who have never experienced the type of volatility that we’ve gone through over the last few days.
It is true that economic fundamentals remain fairly solid but it is also important to remember that this is already probably priced into US equities already, given that we’ve now seen tax reform get passed, along with a new US budget, which in itself is likely to see bond prices come under further pressure.
We’ve already seen a raft of US companies announce significant increases in salaries and bonuses and this was followed last week, with the news that German metal workers won a 4.3% wage rise, a trend that looks set to be replicated across the world, as governments urge employers to increase minimum salaries to more acceptable levels.