Stocks enter correction as rate-hike fears return

This is why the Dow is plunging

Markets followed USA stocks lower after the Dow, coming off a record high, entered a "correction" - that is, a 10 percent decline from its latest peak - for the first time in two years.

The jump in wage inflation pushed yields on the benchmark 10-year U.S. Treasury note US10YT=RR closer to the 3.0 percent mark last seen four years ago, denting the attractiveness of equities, and unnerving investors fearful inflation will force the U.S. Federal Reserve to raises short term interest rates at a faster pace than is now priced into the market.

US stock index futures were down about a third of a percent, setting Wall Street for a lower open on Wednesday, an nearly 2 percent gain in the previous session failing to calm the nerves following the Dow's biggest intraday fall on Monday.

Redemptions from European Equity funds reached 80-week highs, data from EPFR showed, while the pan-regional STOXX 600 (.STOXX) index ended at 368.61 points, down 1.5 percent on the day and 5 percent on the week, its worst week in 2 years.

After the sharp losses over the past three days, the S&P 500 is down 8.5 percent from the most recent record high it set on January 26.

The drop in early trading Tuesday marked the third straight day of steep declines.

"The primary culprit was higher-than-expected wage growth in the January jobs report, which may have increased fears that the Federal Reserve would be more aggressive with interest rate hikes in 2018", according to LPL. The Dow is up 24 percent over that time, the S&P 500 18 percent.

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Major indexes in Asia and Europe also fell following Monday's 1,175-point drop in the Dow Jones industrial average. All other Asian bourses tanked, too, including the Shanghai Composite index, which closed 3.4 percent lower at 3,370.65 and Hong Kong's Hang Seng, which skidded 5.1 percent to 30,595.42.

Some believe the market declines are a positive as constant economic gains could push the Federal Reserve to increase interest rates now resting at 1.7 percent.

Without huge market-moving news to connect to recent swings, translating the numerical into meaningful may be more tied to one's financial disposition rather any kind of economic thesis. That means they are in what is known on Wall Street as a "correction", fueled by fears that a long stretch of low interest rates and tame inflation, which helped driven up stock prices, might be coming to an end. Those include worries about a potential rise in US inflation or interest rates and whether budget disputes in Washington might lead to another government shutdown. Ten-year Treasury yields retreated from close to their four-year highs as stocks fell, while the yen found traction as a haven from the stock turmoil.

In the foreign exchange market, the dollar was flat after earlier hitting two-week highs against a basket of major currencies as investors reduced bearish bets on the greenback.

The Dow fell a record 1,175 points on Monday but rallied back on Tuesday to close the session up 568 points. South Korea's Kospi, which saw only modest losses on Tuesday, fell back by midday, losing 0.7 per cent to 2,435.05. Consider this: The S&P 500 has risen or fallen 1% five times in the past two weeks.

"We're going to continue to see volatile days", said JJ Kinahan, chief market strategist at TD Ameritrade.

Financial analysts regard corrections as a normal event but say the latest unusually abrupt plunge might have been triggered by a combination of events that rattled investors. The Dow is still up 20 percent over that time, the S&P 500 15 percent. "As it approaches 3 percent, concerns about inflation and competition for stocks by fixed income securities are increasing".

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