Major U.S. and Canadian equity indexes have clawed back from their stomach-churning losses at the start of today's trading session, but are still well in the red at midday.
Today's steep sell-off has been blamed on a combination of factors, ranging from concerns about the health of Portugal's top-listed bank to the possibility of the U.S. Federal Reserve hiking interest rates sooner than some expect. There were also unsettling economic reports released out of both Europe and Asia.
None of these factors alone seem to explain the plunge in global equity values earlier today, and seen unlikely to be the trigger point for the long-awaited correction during the multi-year bull market. But with traders increasingly uneasy over lofty stock valuations heading into the second-quarter earnings season, many decided this was the time to take profits.
Shortly past noon ET, the S&P 500 was down 10 points, or 0.5 per cent, at 1,962; the Dow Jones industrial average was off 97 points, or 0.5 per cent, at 16,887; and the Nasdaq was off 29 points, or 0.6 per cent, at 4,390. The indexes were suffering losses of about 1 per cent or more near the start of today's trading.
In Canada, the S&P/TSX composite index at midday was down 75 points, or 0.5 per cent, at 15,139. Losses were led by the energy sector, down 1.2 per cent, even though the price of crude oil has come back from its morning dip, with the September futures contract in New York now trading nearly unchanged.
Gold, which typically benefits from its safe-haven status at times of market turmoil, is doing just that, with spot metal hitting 3 1/2-month highs this morning. The August futures contract is up 1.1 per cent at $1,339.20 (U.S.) per ounce at midday, and gold mining on the TSX is the only one of the 10 major sectors seeing gains today.
The selling pressure started overnight in Europe, where the focus turned to fresh concerns about the health of Portugal's financial sector. The biggest banking group in the country, Banco Espirito Santo, has seen accusations that its main holding company covered up a $1.8-billion (U.S.) hole in its accounts. Accounting irregularities emerged in its holding companies in late May, but today, Portugal's market regulator halted trading in shares in the bank after investors learned that parent company Espirto Santo International had delayed coupon payments relating to some short-term debt securities.
Portugal's PSI 20 index is down just over 4 per cent at midday, its biggest seven-day drop since August 2011.
The woes in the financial sector in Portugal had a significant impact on sentiment elsewhere in Western Europe, with indexes in both France and Germany down around 1.5 per cent at midday. There were some disappointing economic reports released in the euro zone today as well, which didn't help matters. Italy's industrial production unexpectedly fell 1.2 per cent in May, the biggest drop since late 2012, and industrial production in France fell 1.7 per cent, worse than forecast and the largest decline in more than 18 months.
The economic data in Asia overnight weren't market friendly, either. Chinese exports rose by just 7.2 per cent in June from a year earlier, below economists' estimates of 10 per cent. Imports rose 5.5 per cent, against expectations for a 5.8 per cent increase.
Another catalyst blamed for the sell-off today: a refocus on the minutes of the last Federal Reserve policy meeting, released on Wednesday, where officials expressed concerns about the complacency seen among market participants of late. Some officials worried these factors "are an indication that market participants were not factoring in sufficient uncertainty about the path of the economy and monetary policy," the minutes said.
The Federal Reserve said explicitly for the first time that it intends to end its extraordinary bond-buying program in October, although markets were already largely factoring in this scenario.
Bloomberg News also released an interview overnight with Federal Reserve Bank of St. Louis President James Bullard, who said the central bank may raise interest rates sooner than investors expect. The interview was conducted on Wednesday, prior to the release of the Fed minutes, with Mr. Bullard saying that a rapid drop in joblessness will fuel inflation, bolstering his case for an interest-rate increase early next year. He predicted inflation of 2.4 per cent at the end of 2015, ahead of the Fed's 2 per cent target.
In a further sign of positive momentum in the U.S. labour market, new jobless claims for last week fell to one of its lowest levels since before the recession that started in 2007, fresh data this morning suggested.