A sharp drop in US stocks is causing tremors thousands of miles away in Asia and Europe.
Major share indexes in the United Kingdom, Germany and France fell more than 1% in early trading, following Wednesday’s bloodbath in American markets, where the Dow plunged 3.2%.
The steepest losses in global stocks were in Asia, where some regional markets were already struggling. Stocks in Shanghai and Hong Kong entered bear market territory earlier this year.
Shanghai and Tokyo closed down 5.2% and almost 4%, respectively, on Thursday. Hong Kong’s market dropped over 3.5%.
The US sell-off delivered a fresh hit to the confidence of Asia investors, said Jingyi Pan, a strategist at trading firm IG Markets.
Investors are very pessimistic about the Chinese market, which is being buffeted by the country’s economic slowdown and the trade war with the United States, said Hao Hong, head of research at investment bank Bocom International.
Chinese tech stocks suffer
Just like in the United States, tech stocks were among the biggest losers. Chinese social media and gaming company Tencent (TCEHY) sank almost 6% on Thursday, while smartphone maker Xiaomi plummeted more than 8%.
Share prices in Asia are getting hurt by the recent rise in yields on US Treasury bonds, which are now near a seven-year high. Stocks tend to slump after sharp spikes in yields because that makes bonds, which are seen as safer assets, more appealing. Asian stocks are particularly vulnerable, since they’re viewed by traders as riskier than US ones.
Higher borrowing costs also squeeze company profits.
Tech stocks are particularly vulnerable because they are among the most highly valued parts of the stock market, according to metrics widely used by investors. When investors get nervous, they are more likely to offload tech companies and move into assets that are seen as less risky, such as utility firms.
Hong Kong’s market often reacts to movements in US Treasury yields because the Chinese territory, whose currency is pegged to the dollar, follows the US Federal Reserve’s monetary policy, Hong said.
Kit Juckes, a strategist at Societe Generale, said that investors were paying more attention to local events in Europe, where Brexit and rising political risks in Italy have been front of mind.
In Germany, where exports drive the economy, intensifying global trade conflicts have been reflected in stocks. The benchmark Dax entered correction territory in February.
What comes next
Investors have other reasons to fret, including a potential slowdown in global economic growth, the strengthening dollar and the next phase of the global trade war.
Money manager Fidelity argues that Asian stocks are still “compelling” for investors because stocks are generally cheaper there than in the United States. They could rise in the long term as Asia becomes wealthier.
“The long-term fundamental story for Asia led by rising domestic consumption remains unchanged,” said Medha Samant, investment director for Asian equities at Fidelity International.
Juckes argued that US markets were playing catch up to trends that have already affected global currencies and emerging markets.
“For much of 2018, the US economy has been oblivious to a turn in the global economic cycle,” he said. “This week has seen the S&P, and the Nasdaq, sit up and pay attention to what’s going on.”