After Friday’s 666-point drop for the Dow Jones Industrial Average, Monday was a day of utter carnage in the US equity market. An initial 300-point decline in the DJIA was almost fully reversed by lunchtime but in the last few hours of trading the index went into freefall, losing well over 1,000 points to end the day down 1,175; the biggest ever points drop, albeit in percentage terms only the 112th largest drop in the 122 years since inception. The VIX index of volatility, meantime, had its biggest ever daily jump and will go down in the history books along with Lehman, the ‘flash crash’ and the US downgrade. Amidst the turmoil, the US Dollar was steadily bid throughout the day and its index against a basket of currencies is now more than a full point above last Thursday’s low. It still hasn’t recovered all the losses from Davos but it looks in technically better shape than it did just a few days ago with the USD index this morning at 89.35.
The big fear for today is that further selling pressure will be seen in US equity markets as programme traders and algorithm-driven investment strategies are forced to cover short volatility positions, which in turn will add to the technical pressure on stocks. The price action Monday afternoon was so wild that literally anything seems possible today. An equity market which can drop 700 points in under half an hour with no fundamental trigger is obviously a much scarier place than one in which a 2% daily correction hadn’t been seen in over a year.
New Federal Reserve Bank Governor Jerome Powell was sworn in yesterday and there was no shortage of analysts pointing out comparisons between the situation today and when new Chairman Alan Greenspan took office on August 11th 1987; barely two months from the stock market crash of Black Monday, October 19th, that year. There are plenty of Mr Powell’s colleagues set to give speeches this week; Messrs. Bullard, Evans, Dudley, Kaplan and Harker will all be offering their views on the economy. It will be interesting to see if the speakers have soothing words for stock market investors or focus, instead, on the continued normalization of US monetary policy. Ahead of that, the USD index opens in North America at 89.35 with 10-year US bond yields down 15bp from Friday’s high at 2.70%.