Asian stocks capped their worst week in years, with more heavy selling coming after a late slump pushed the Dow Jones Industrial Average and S&P 500 into correction territory.
Benchmarks in Japan, Hong Kong and Shanghai were poised to join them in falling at least 10% from their most-recent high, with declines Friday in all three markets of at least 2.5%.
Many investors believe the past week’s selling has reflected an overdue pullback after big 2017 and early 2018 gains, exacerbated by fears of rising inflation and a crash in products betting on low volatility. Investors withdrew $30.6 billion from EPFR-tracked equity funds in the first week of February, and all major equity benchmarks bar Italy have now wiped out 2018’s gains.
Chinese stocks fared the worst, falling as much as 6% at one point. The Shanghai Composite SHCOMP, -4.05% less than a month removed from a record 11-day winning streak and rising in 18 of 19 days, fell to levels last seen in May on Friday. It closed down 4%. For the week, the index is down 9.6%, which is its biggest weekly loss since January 2016.
Hong Kong’s stock benchmarks were also pressured by selling in China. The Hang Seng Index HSI, -3.10% closed down 3.1%, with a drop of just over 10% its worst since 2008.
New Zealand’s benchmark NZ50GR, -1.04% , which fared relatively well Friday in dropping just 1%, still had its biggest weekly decline since 2010. The weekly decline was the biggest since 2011 for Taiwan’s Taiex Y9999, -1.49% and Singapore’s Straits Times Index Y9999, -1.49% , and since 2012 for South Korea’s Kopsi SEU, -1.82% .
The bearish sentiment flowing from U.S. markets is exacerbated by traders looking to book in profits and exit positions ahead of the Lunar New Year holiday at the end of next week, said Dickie Wong, executive director of research at Kingston Securities.
Japan’s Nikkei NIK, -2.32% closed down 2.3%, falling 8.1% for the week, the most in two years, as haven flows into the yen also pressured that country’s stocks.
Short sellers are helping fuel today’s declines in Japan, said Kyoya Okazawa, head of institutional clients for global markets in Asia-Pacific with BNP Paribas . “This is not systematic selling; it’s people creating shorts today. There’s still some leverage positions that need to be worked out.
”Much market talk continues to focus on whether the past week’s selling has been an overdue pullback after big 2017 gains for many stock markets globally or the start of a sustained decline.
“It is reasonable to not want to carry risk into the weekend, but some longer-term investors might see this as a buying opportunity,” said Tony Cheung, head of quantitative analytics for Asia-Pacific at Liquidnet.
Deutsche Bank expects “market turbulence” to continue this year as pullbacks and volatility become more common as interest rates and bond yields rise, chief economist David Folkerts-Landau said. But “more volatility should not derail the underlying economic expansion or fundamentally dent risk assets.”
S&P 500 futures ESH8, +0.66% were recently up 0.6% after the index’s 3.8% skid Thursday, much of it occurring in the last hour of trading.
That selling came despite Treasury yields moving little on Thursday. Rising yields had been cited as a factor in equities’ turn over the past week, but on Thursday 10-year Treasury yields remained about 2.85%, around four-year highs. They were recently at 2.854%.
Stephen Innes, head of trading for Asia Pacific at Oanda, said it felt like the market was targeting 3% yield for 10-year Treasurys “given the rapid moves over the past few weeks.” He believes that once reached, “the markets will relax and hopefully come back. In the meantime, I think while bond desks are chasing bond yields...equity markets are going to continue to struggle.”
In the U.S., the Senate approved a breakthrough two-year budget deal and stopgap spending bill early Friday, sending the package to the House too late to prevent a government shutdown that began at midnight.
There was no immediate market reaction, with the WSJ Dollar Index BUXX, -0.02% remaining essentially flat for the session.