The U.S. stock market is on high alert Tuesday following a historic collapse in Japanese markets overnight and a day of fiscal carnage in Europe.
The European selloff in bank shares, ignited by Deutsche Bank Monday, bled into Japan as the countries experience the effects of negative interest rates. The yen rocketed to a 15-month high, eviscerating the Japan’s stock index, Nikkei 225, which shed over 918 points as it tumbled down 5.4 percent.
The yield on a benchmark 10-year Japanese government bond (JGB) fell below zero percent for the first time ever, as negative rate policy from Japan and the European Central Bank (ECB) begin destroying any return on investment from government debt. As fear chokes global markets, gold has soared to its highest price since June, reports Business Insider.
European markets picked up where they left off Monday, with the FTSE 100 index falling to three-year lows. Mounting concerns over global financial stability and a dip in crude oil to $30 dollars a barrel sent shockwaves around markets Monday, as did a growing skepticism of central bank policy.
Central banks globally have been stimulating growth through currency devaluations and unprecedented cuts in interest rates, however, growth remains sluggish at best. In response, the ECB and Japan have moved to negative interest rates, gambling the public still trusts their credibility, reports Financial Times. The bloodbath in Japan’s markets would suggest otherwise.
“The impact of [quantitative easing] seems to be becoming less meaningful,” Brian Kleinhanzl, banks analyst at Keefe, Bruyette & Woods told the Financial Times. “Investors are worried about what central banks have left.”
U.S. stocks are having another day of unpredictability and potential turmoil, with the Dow Jones Industrial Average down 115 points as of 11 a.m. The Dow, S&P 500 and Nasdaq all made positive early gains, the Dow ratcheting up over 200 points, but have since all swung back into red, remaining volatile. Stocks took a beating Monday, slipping almost 400 points before recovering slightly at the close — losing 177 points that day. (RELATED: US Stocks Crumble As Market Panic Rises)
The historic events taking place in global markets will add to the scrutiny of Fed Chair Janet Yellen’s testimony to Congress on Thursday. The head of the U.S. Federal Reserve will deliver a report to Congress on the state of the economy, long term projections and the future of monetary policy. The last report she delivered occurred before the market chaos of 2016, so Yellen is expected to strike a more measured tone, reports Reuters.
“She needs to come across as optimistic without being too hawkish and cautious without being negative,” Jo Masters, senior economist at Australia and New Zealand Banking Group, told Reuters. “Hawkishness or dovishness could easily exacerbate the current sell-off, tightening financial conditions further.”
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