No one was safe today.
First, the scoreboard:
- Dow: 14,758.3 -353.8 -2.3%
- S&P 500: 1,588.1 -40.7 -2.5%
- NASDAQ: 3,364.6 -78.5 -2.2%
And now, the top stories:
- Stock, bonds, commodities, and currencies around the world got destroyed today. Today's drop in the S&P 500 was the worst one since 2011.
- Today's calamity was really an extension of yesterday's sell-off, which appeared to be triggered by comments made by Federal Reserve Chairman Ben Bernanke. Specifically, he said that the Fed could begin to taper, or gradually reduce, its quantitative easing program as early as later this year. In other words, they would be scaling back on their monthly purchases of $85 billion dollars worth of mortgage bonds and Treasury securities.
- This sparked a sharp sell-off in the worldwide bond markets, which translates into higher interest rates. Earlier today, we saw the 10-year rate go as high as 2.47%, a level we haven't seen in years. Bonds across the emerging markets did particularly poorly.
- Another bad headline that crossed was that manufacturing activity in China decelerated more sharply than expected in June. This is worrisome because China is the world's second-largest economy and also its most important source of economic growth. "A good deal of the weakness was apparently driven by external developments as the new export orders index plunged 4.9pt to 44.0, the lowest reading since the middle of the Great Recession," said Societe Generale's Klaus Baader. "This collapse is quite difficult to fully believe, given developments in the region and the global economy, where there are no signs of such a collapse of demand."
- Some argue that the most devastating news was the surge in an obscure Chinese interest rate called SHIBOR, or the LIBOR of China. In 2008, surging LIBOR rates preceded the global credit crunch, causing the global economy and financial markets to spiral.
- The breadth of the sell-off was breathtaking. Usually, when one asset class sells off, another rises. And when a lot of asset classes fall, the so-called "safe havens" will rise. These include things like U.S. Treasuries, gold, and a handful of other currencies like the Swiss Franc or Japanese Yen.
- But commodities got destroyed across the board. Gold prices fell by 7%. Silver prices fell 9%. Copper fell 3%. WTI oil prices fell by 3%. Natural gas prices fell by 2%. Corn, soybean, and rice prices all fell by over 1%.
- "Markets will now adjust to a new negative shock to the trio of the liquidity, risk and term premia," said PIMCO's Mohamed El-Erian in a prescient post yesterday. "Heightened volatility will also fuel even greater risk aversion, including lower appetite for inventory buildup among brokers and greater cross-over investor migration back to home base. Expect further market volatility and liquidity dislocations in the immediate period ahead. "
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