Asian stock markets fell sharply on Tuesday, building on the heavy selling in the U.S. a day earlier.
More declines loom for U.S. equities. After the S&P 500 slid 4.1%, the most in 6 1/2 years, futures ESH8, -0.12% were recently down 2.8%, raising the specter of the index’s first drop of at least 10% in two years.
“It’s pretty crazy,” said Chris Weston, chief market strategist at IG in Melbourne, Australia. “There has been a large portion of people who don’t quite understand why things have happened.”
Japan’s Nikkei Stock Average NIK, -4.73% was set to log one of its biggest point drops since 1990, briefly falling more than 1500 points, or 7%. In two weeks, the index has wiped away some 60% off a rally that led it to 26-year highs from September through January.
Selling was made worse by haven flows that are lifting the yen. Even as the U.S. dollarJPYUSD, -0.000916% has broadly gained, it was recently down to ¥108.50 from ¥110 at the close of local stock trading Monday.
Stock benchmarks in Taiwan and Hong Kong sank 5%, while Singapore, India and Australia were logging declines of at least 3%. China and South Korea were off about 2%.
Investors that follow strict rules-based approaches to investing, such as risk-parity funds that attempt to maintain a constant level of volatility, were forced to sell because of the increased market fluctuations, he said.
The tumult has been exacerbated by sales of exchange-traded notes tracking implied volatility, which had become a popular way of betting on whether the recent calm in global equities would continue.
Many institutional investors were pausing to see where markets settled before taking big positions, said Lee Porter, managing director for Asia Pacific at brokerage Liquidnet.
“We’ve been through such a prolonged period of low volatility, and it was a question of when, not if, it would end,” he said.
With that lull shattered, many ETFs betting that volatility would remain low have suffered wrenching declines.
Japanese investment bank Nomura said Tuesday it would close one such fund early after the underlying index plunged 80% Monday, hitting a condition for early redemptions.
“We apologize from the bottom of our hearts for causing great inconvenience for the holders,” the fund said in a statement.
In Hong Kong, money flooded in from mainland China through the Shanghai Stock Connect, which allows reciprocal investment of stocks between the two cities. Net inflows hit the highest level since April 2015, when the link’s daily trading limit was last triggered.
Ric Spooner, chief market strategist at CMC Markets, said the writing has been on the wall for a retreat for weeks. All markets needed was for sentiment to turn, he said.
The S&P 500’s average forward price-to-earnings ratio from 2013 to 2017 was 16.1, with the 10-year Treasury yield averaging 2.17%. But both have been rising lately, “suggesting something might give,” Spooner said. Even with the S&P 500 down 8% from its latest record closing set a week and a half ago, it is still above average at 16.75 after recently peaking at 18.5, he added.
Monday’s global stock selloff sent Treasurys into rally mode after a rough start to 2018. The 10-year yield has fallen to 2.66% from 2.85% late Friday in New York.
That-risk off sentiment also bled into expectations for how quickly the Federal Reserve will raise interest rates this year. Fed-fund futures show 26% odds of a combined three quarter-point rate increases this year, versus 35.5% on Friday, according to CME data. Meanwhile, the probability for two increases has risen to 35% from 27% and odds for four hikes have slumped to 9% from 21%.
Oil futures fell 1.1% in Asian trading, putting Brent futures LCOJ8, -0.84% below $67 a barrel. Bitcoin BTCUSD, -16.03% slumped below $6,400, after sitting at $10,000 on Thursday.