A selloff that started in Asia, and then bled into Europe, is poised to cascade into U.S. markets as worries swirl over how long central bank easing can continue. Dow futures are down 120 points, or 0.79%, while S&P 500 futures are down 0.94%. Commodities are sharply lower as well, with oil, gasoline and gold all off more than 1%.
European shares hit a six-week low on Tuesday over concerns the phase of plentiful central bank support for markets is coming to an end. The European Central Bank faced a legal challenge over its most effective stimulus measure.
The ECB was set to defend its bond-buying program – widely credited with easing concerns over a possible euro zone breakup and helping stocks to rally – before Germany’s top court against challenges that the scheme is illegal.
Also weighing on the market was an overnight decision by the Bank of Japan not to take fresh steps to calm bond markets, highlighting a debate at the Federal Reserve over when to start trimming the U.S. asset purchase program.
The pan-European FTSEurofirst 300 index, which has shed 5 percent in the past 12 sessions, fell a further 1.6 percent on Tuesday to trade at 1,174.79 points by 1019 GMT, hitting six-week lows. Martin Tormey, head of equity trading at Goodbody Stockbrokers said:
There are worries around this court case in Germany and … there were thoughts that BoJ were going to take the volatility out of the bond market and that hasn’t happened. It’s all just added to the volatility of the market and it’s scared a few longs.
Implied volatility on EuroSTOXX 50 – based on options prices and seen as a crude barometer of investor risk aversion – jumped more than 8 percent.
The euro zone blue-chip index itself was down 1.7 percent at 2,674.53 points, taking it below technical supports of the 60-day moving average around 2,707.88 points – a floor during bouts of weakness the previous session – and 50 percent retracement of the mid-April to mid-May rally, around 2,696.55. Riccardo Ronco, head of the Technical Analysis at Aviate Global, said:
For me the picture is still deteriorating in the short term … we are almost approaching the 100-day moving average and I think we are going to go a bit lower. We are correcting the April-May move, but the longer it takes, the more medium-term indicators will be impacted and then we enter into the possibility of a deeper correction.
Weakness on the broader equity market hit shares of companies which make money by investing in stocks, with Aberdeen Asset Management down 5.7 percent.