US equities routed as tech stocks slide
Given the scale of last night’s Wall Street capitulation, Asian equity markets are surprisingly resilient today. Although bourses are down across the region, it is nowhere near the scale of the meltdown in New York, where the S&P 500 fell 3.52%, the Nasdaq collapsed by 4.96%, and the Dow Jones fell 2.79%.
The Nikkei 225 is down only 1.05% with the Kospi lower by 1.50%. In China, the CSI 300 has fallen by 1.0% and the Shanghai Composite and the Hang Seng by 1.50%. Singapore is 1.60% lower, with Australia’s ASX 200 and All Ordinaries the region’s worst performers, down 2.50%. Jakarta is 1.0% lower, while Bangkok and Kuala Lumpur are both down only 0.15%.
The refusal of Asia to blindly follow Wall Street’s extremes overnight likely reflects that other asset markets were almost unmoved overnight. Wall Street’s fall being driven by extreme option positioning and over-weighted of FOMO traders, a situation not as prevalence here in Asia. That is also likely to be the case in Europe this afternoon, although it shall not entirely escape.
So, the overnight sell-off which sent equity markets tumbling should not have come as a rude surprise. Why? All one has to do is take a look at the insane level of short-term call open interest, and the lofty P/E valuations of the K-Pop recovery darlings of Wall Street. With this in mind, the rout overnight was due to happen sooner or later. It just happened to be last night. Could there be more losses to come? As Mohamed El-Erian (one of my idols) postulated overnight, equity markets could fall by another 10-15 percent. Given the scale of the rally in stocks since mid-March, that kind of a downturn would still leave equity markets comfortably in a bull market scenario, but with saner valuations. A K-shaped recovery turning into an h-shaped one for a while would certainly not be a bad thing.
Tonight’s Non-Farm Payrolls remain the key to the next direction for equity markets. A firm number could see the equity sell-off finish as soon as it stated, while a weak number could signal more downside pain ahead in the near-term.
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