Wall Street turmoil engulfed major Asian markets on Friday, racking up more losses in a brutal week for trading. In Hong Kong, the Hang Seng closed down 943.85 points, or 3.1%, to 29,507.42 points.
It was a similar story in Shanghai, where the composite index dropped more than 4%, or 132.2 points, to 3,129.85, while Japan’s Nikkei fell over 2% to 21,382.62. South Korea’s KOPSI was also down nearly 2% at 2,363.77, while Australia’s benchmark ASX tumbled just under 1%.
The sell-off was triggered by the overnight carnage in New York, where the Dow Jones Industrial Average plunged more than 1,000 points for the second time this week. On Thursday, it ended 4.2% lower at 23,860, while the S&P 500 closed down 3.8% and the Nasdaq sank 3.9%.
“This whole correction is really about [interest] rates,” Stephanie Link, the global asset management managing director at TIAA, told CNBC.
“It’s really about inflation creeping up. It’s really about people thinking the [US Federal Reserve] is either behind the curve or actually has to be more aggressive. That fear, that unknown is really what’s driving a lot of the anxiety,” she added.
Key to this is that investors have begun to worry that inflation in the US might rise more quickly than expected, prompting rate rises which would hit the markets. There are also concerns about the US government budget proposal announced by lawmakers. This will raise spending and could inflame inflation.
Bond yields have started to climb in the past few weeks, a signal of higher interest rates, which in turn would push up borrowing costs for companies, squeezing corporate profits and curbing economic activity.
Still, financial analysts have stressed for months that the markets were due a correction after an amazing bull run.
“The latest decline takes us back to where we were on Nov. 17,” Greg McBride, the chief financial analyst at Bankrate.com, which tracks interest rates, told the BBC. “We’ve just given back some recent gains, but not wiped out anyone’s life savings.”
This week’s rollercoaster ride started in New York after markets in Asia plunged following Monday’s overnight sell-off on Wall Street. At one point, the benchmark Nikkei 225 index plummeted 7%, the biggest one-day drop since 1990, before recovering slightly to close 4.7% down.
In a trading horror story, the boards in Hong Kong, Seoul and Shanghai all turned red with the Hang Seng Index ending up in freefall on Tuesday.
At the close, it was more than 5% down at 30,595.42, while the Shanghai Composite Index dropped 3.4% to 3,370.65, its biggest single-day decline for nearly two years.
The rout continued in Singapore, where the Straits Times Index edged down 2.20% to close at 3,406.38.
“Since last autumn, investors had been betting on the goldilocks economy – solid economic expansion, improving corporate earnings and stable inflation,” Norihiro Fujito, a senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities, told Reuters. “But the tide seems to have changed.”