It was the worst week of the calendar year for the stock markets, both in the U.S. and in many places around the world. After Thursday saw U.S. stocks sink lower on the uncertainty surrounding the global economy and a slew of unfavorable economic data, Asian markets followed their Western counterparts lower on Friday. The Shanghai Composite lost more than 4%, Taiwan shed more than 3% with Japan’s Nikkei 225 just behind (-2.98%) to notch a 6-week low, and Hong Kong’s benchmark Hang Seng index fell by more than 1.5% to extend deeper into a correction from its high in April.
On Friday alone, the Dow Industrials fell more than 500 points, or roughly 3.1%, to hit its lowest point since last October’s freefall. It seems that it was ages ago that the Dow Jones cruised past the 18,000 threshold; now it slid back below the 16,500 mark. Similarly, the Standard & Poor’s benchmark index fell below the 2,000 level for the first time in 6 months. All 10 sectors within the S&P 500 sank into the red on Friday, and a broad spectrum of industries from biotechnology to energy have entered correction—meaning a 10% decline from their previous 52-week highs. Even the small-cap Russell 2000 index entered correction, off by 11% from its highs. The Nasdaq Composite actually led the downward slide to close out the week, falling by more than 3.5% on Friday.
Although much of the attention over the past two weeks has been focused on the widespread impact that weakness in China (in its currency, its stock market, and its manufacturing sector) is having on the rest of the region, and around the globe, the bloodbath for equities was not limited to Asia nor North America.
Europe also felt the sting of the global selloff, with London’s FTSE 100 losing 2.8% and France’s CAC 40 sinking by 3.2%. The continent-wide EURO STOXX 50 also fell by more than 3%, while the more inclusive EURO STOXX 600 (another European stock index operated by the same firm) capped its worst week since August 2011. This was also coincidentally the last time that the S&P 500 went into a full-fledged correction.
Flight from Equities into Safe Havens
Whether or not it signals a definitive trend change, the negative sentiment driving the stock markets lower has unsurprisingly forced investors to flee toward what seem to be safer assets. In the case of currencies, the euro and yen gained the most from safe haven flight, each adding 1% against the dollar on Friday, while the Swiss franc is also a popular choice. With oil continuing to be dragged lower, nobody is jumping to move into commodities or emerging markets.
Government bonds are also a traditional choice due to a belief in their stability and relative safety. U.S. Treasuries saw a huge spike this week as stocks tumbled lower, pushing yields for 10-year T-notes down as low as 2.04% by Friday afternoon, down 29 basis points from just a month ago (2.33%). The 10-year bonds for Japan and Germany were yielding just 0.36% and 0.56%, respectively, while the Swiss 10-year bond was actually providing a negative yield of -0.24%. (Swiss debt is apparently so safe that investors will pay interest to park their money in such bonds, as opposed to the normal scenario of receiving interest upon maturity.)
The main safe havens, however, are the precious metals—especially gold. Both gold and silver have gained over 6% thus far in August amid the vast losses for equities. Again, there’s no telling how sustained the painful correction for equities is going to be, or how much demand government bonds can absorb; but until the global markets become a bit less volatile, savvy investors will continue to trust in the relatively solid ground of physical bullion.