Volatility and panic selling result in heavy losses across the region as the sell-off spreads to mainland China

Spooked investors caused Asian markets to plummet on Friday following what some described as panic selling on Wall Street which saw the Dow Jones drop by more than 1,000 points for the second time in a week.

A mass sell-off spread to China for the first time in the current crisis as the Shanghai Composite index fell by 5.6% at one stage and the Hang Seng in Hong Kong slipped more than 4%.

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The rout on Asian markets came as traders digested the news of the Dow’s fall and analysts noted that both it and the S&P500 had now declined about 10% from their late January highs, signalling a correction.



In Japan, the benchmark Nikkei 225 index fell by as much as 3.5% in morning trade, but the losses were pared back to 2.3% at the close of trade.

South Korea’s Kospi was down about 1.9% in mid-afternoon trade, while Australia’s benchmark ASX200 index ended the day down 0.9% – a loss of $A20bn.

“There’s some big-money players that have really leveraged to the low rates forever, and they have to unwind those trades,” Doug Cote, chief market strategist at Voya Investment Management, told Bloomberg News. “They could be in full panic mode right now.”

Quick guide The stock market drop Show Hide Why are stock markets falling? For several weeks, economists and analysts have warned that inflation levels in major economies could increase this year beyond the 2% to 3% that central banks believe is good for developed countries. Official US figures turned those concerns into a sell-off last Friday, after they showed average wage rises in the US had reached 2.9%. The data increased fears that shop prices would soon rise further, increasing the pressure for high interest rates to calm the economy down. Investors then bolted at the prospect of an era of cheap money – which encourages consumers and companies to spend – coming to an end. Over the past month, several members of the US central bank, the Federal Reserve, have argued that three 0.25% interest rate rises scheduled for this year could become four or five. Is there worse to come? There is every prospect that the US economic data will continue to strengthen, increasing the potential for higher interest rates. President Donald Trump’s tax reform bill, which gained approval in Congress before Christmas, will inject more than $1tn (£710bn) into the US economy, much of it in the form of corporation tax cuts. Many firms have pledged to give a slice of the cash to their workers. Decades of flat wages should mean that increases expected in 2018 and possibly 2019 are too small to trigger a reaction from the central bank, but investors are betting rates will rise. As a consequence, stock market jitters could continue. Is it a threat to the global economy? Many developing world economies have borrowed heavily in dollars and will be stung by the higher cost of servicing their debts. On the other hand, a booming US economy will suck in imports from those nations, boosting the incomes of the developing world. However, the eurozone looks unlikely to increase interest rates until its recovery is more firmly anchored. That means the euro will continue to rise in value against the dollar, making it harder for European countries to export to the US.



Chris Weston, chief market strategist at the online trader IG in Melbourne, said volatility was the main problem.

He said the Vix volatility index – also known as the “fear index” – had spiked sharply this year “and that means there is no confidence about going out and filling your boots with stocks”.

“You could wake up and the Dow is down another 1,000 points, or it could be up,” Weston said. “There’s no certainty. Markets like certainty but the only certainty at the minute is of a big move and that could be up or down.”

Analysts in Japan suggested that the correction in equities could last until March.

“Tokyo shares had fallen to a level that was attractive for buying, but investors refrained from doing so after seeing a wild correction in the US market,” Masahiro Ichikawa, a senior strategist at Sumitomo Mitsui Asset Management Co. told Kyodo News.

In another drama during afternoon trading in Asia, expectations rose of another US government shutdown. Kentucky Republican senator Rand Paul stalled a vote on a budget agreement as he complained about “reckless” deficit spending, paving the way for a shutdown at midnight local time. However, the Senate is tipped to resolve the standoff in the early hours of Friday morning.

Jonathan Corpina, senior managing partner at Meridian Equity Partners in New York, said further volatility was likely in coming days.

“The dust hasn’t settled yet, and I think both buyers and sellers are trying to figure out what this market really wants to do,” Corpina said.

“I would think that this continues to happen for the next few trading sessions for everything to kind of get flushed out.”

Last Friday’s strong US jobs and wages figures strengthened the feeling that inflation was on the rise and that interest rate increases would not be far behind. The Bank of England signalled on Thursday that an interest rate hike was coming from as early as May.

Jim Rogers, the veteran US investor, said he expected the selling to continue until the US Federal Reserve raises rates in March. Without predicting the timing, Rogers also issued a more general warning about the next big market crash.

“When we have a bear market again, and we are going to have a bear market again, it will be the worst in our lifetime,” he told Bloomberg. “Debt is everywhere, and it’s much, much higher now.”