Markets tumble as volatility surges

Markets fell last week amid concern over global economic growth.

The MSCI All-Country index tumbled 2.7 percent last week. The Standard & Poor's 500 Index fell 3.1 percent and the STOXX Europe 600 Index fell 4.1 percent, both these indices suffering the biggest weekly decline since May 2012. The MSCI Asia Pacific Index fell 1.1 percent.

The US 10-year Treasury yield fell 14 basis points last week to 2.29 percent, at one point hitting 2.28 percent, the lowest in more than 15 months.

Oil entered a bear market as both West Texas Intermediate and Brent crude fell last week by 4.4 percent and 2.3 percent respectively.

The weakness in markets contrasted with the positive economic reports for the United States economy last week. Mortgage applications rose 3.8 percent in the week ended 3 October while initial claims for unemployment benefits fell by 1,000 in the same week, pushing the four-week average down to 287,750, the lowest since February 2006.

Unfortunately, economic data elsewhere were not so positive.

In the euro area, German industrial production fell 4.0 percent in August, factory orders fell 5.7 percent and exports plunged 5.8 percent.

In China, Markit's composite index fell to 52.3 in September from 52.8 in August.

In Japan, the leading index fell to 104.0 in August from 105.4 in July and the coincident index fell to 108.5 from 109.9. The economy watchers survey's current conditions index was unchanged at 47.4 in September but the future conditions index fell to 48.7 from 50.4 in August.

One bright spot was in core machinery orders, which rose 4.7 percent in August, the third consecutive increase.

Still, the increase in volatility in markets has raised concerns for the outlook. After the US trading session last Thursday, Bloomberg reported:

This week’s vortex in equities is a sign of things to come for Donald Selkin, the chief market strategist for National Securities Corp.

Three days of Standard & Poor’s 500 Index swings exceeding 1.5 percent have sent the Chicago Board Options Exchange Volatility Index up 21 percent since Oct. 6 to 18.8, a level not seen since February. About $800 billion has been erased from U.S. equities in three weeks as the average size of daily moves in the S&P 500 almost doubled.

The surging VIX, which usually moves in the opposite direction as the S&P 500, is “a dangerous sign because we’ll have broken through some resistance,” Selkin, whose firm oversees about $3 billion, said by phone. “In a sense, if we don’t hold here, then we could see the next resistance level around 21, which would take us down another couple hundred points.”

The VIX duly hit 21.24 on Friday.

Also, from the Bloomberg article:

For traders guided by price charts, a bigger test for the S&P 500 is looming about 1 percent below its level now, at 1,909, according to Ryan Detrick, a Cincinnati-based strategist at investment research firm See It Market. That’s where the index bottomed on Aug. 7 before starting a 5 percent rally.

“That August low is a big level, and you have the 200-day moving average down there as well,” at 1,905, he said. “We’re getting to the area where we’ve seen bounces before. The area down there looms large, and with small-caps already broken down, you’d like to see large-caps gain some kind of footing.”

And again, the price test was also challenged on Friday, with the S&P 500 falling to 1,906.13.

It looks like Friday's close has set up an interesting week for the US stock market this week. Whether it bounces up from here or continue to decline could point to the medium-term outlook for stocks.