Wall Street dropped on Monday in tumultuous action as traders raced into safe-haven assets amid mounting worries over instability in China and emerging markets.
The Dow Jones Industrial Average (^DJI) skidded 588.5 points, or 3.6%, to 15871.3, the S&P 500 (^GSPC) dropped 77.7 points, or 3.9%, to 1893.2, and the Nasdaq Composite (^IXIC) fell 179.8 points, or 3.8%, to 4526.3.
Trading was extremely volatile. The Dow plummeted 1089.4 points at the lows of the session. Meanwhile, the CBOE's VIX spiked 41.6%. The gauge was up an astounding 205.4% from the same day last week.
The S&P, Dow, and Nasdaq both tumbled into correction territory, having fallen 10% from a recent high. The latest round of selling stripped some $811.5 billion in market value from U.S. firms.
Global equity markets faced selling across the board on the day as well. China's volatile Shanghai Composite (000001.SS) crumbled 8.5%, wiping out its gains for the year, while Japan's Nikkei 225 (^N225) tumbled 4.6%. The selling ricocheted across European bourses, sending the Euro Stoxx 50, a gauge of large-capitalization eurozone companies, sinking 5.7%. German's DAX also tumbled into bear-market territory.
"The immediate driver of ... (the) sharp global market selloff is two-fold: the lack of substantial policy announcements over the weekend, especially out of China; and the absence of good economic news," wrote Mohamed El-Erian, chief economic adviser at Allianz, in an email interview with Yahoo Finance.
"Together, these two factors translate in the lack of an immediate circuit breaker. As such, markets are in the grips of (an) ugly deleveraging technical, with contagion and overshoots ruling."
El-Erian also cited concerns over emerging-market currencies. Several Asian currencies have been hit hard recently after China devalued its yuan earlier this month. The collapse in oil prices has also put pressure on other currencies of energy-centric economies.
Flight to safety
Traders took cover in a variety of safe-haven assets. The yield on the benchmark U.S. 10-year Treasury bond fell 0.06 percentage point to 1.988% -- falling under the 2% mark for the first time since April. Bond yields move in the opposite direction of prices, so as traders bid-up the asset, yields fall. The Japanese yen, another global defensive play, advanced against the U.S. dollar and the euro.
Every major S&P 500 sector capped the session in the red. The biggest losers were energy, financials and materials. Telecommunications and technology avoided the worst of the selling.
Commodities were under heavy pressure, with the Bloomberg Commodity Index slumping to its lowest level since 1999. U.S. crude oil prices (CLV15.NYM) plummeted 5.4% to $38.27 a barrel, striking a fresh 2009 low. Brent crude (BZX15.NYM), the global benchmark, fell below the $45-a-barrel mark for the first time since 2009. Copper (HGQ15.CMX), seen as a bellwether for global economic conditions, skidded 2.8% to $2.24 a pound. Gold (GCU15.CMX) prices were little changed at $1,153.00 a troy ounce.
Still, despite the grim scene across global equity markets, many market participants see opportunities for those willing to ride out the storm.
Analysts at Bank of America Merrill Lynch note pullbacks of 5% or more occur three times a year on average, "and we were overdue." The team, however, suggests looking for "quality" names to scoop up at a discount.
"Quality is the best hedge against rising volatility, and is currently undervalued and underowned by active managers," the Merrill Lynch team wrote in a research note on Monday.
Indeed, El-Erian echoed that sentiment, noting, "this sharp downturn will eventually create interesting opportunities for investors."
Peter Kenny, chief market strategist at Clearpool Group, agreed as well, saying in a letter to clients Monday the he remains "positive" on U.S. equities overall.
"Great stocks get sold, and in some cases punished, not because of their lack of value but simply because the trend line for the broader market has faltered," he wrote.
The recent bout of market turbulence also has many market observers paring back expectations for when the Federal Reserve will hike interest rates from historic lows. Up until a couple of weeks ago, the consensus among many on Wall Street was the Fed would boost rates in September.
"It is now a lot harder for the Fed to hike in September. The window for starting the interest rate normalization process, which was wide open a few months ago, is now closing," Allianz's El-Erian said.
Barclays also pushed its call for the first rate hike since 2006 to March 2016, from September of this year.