Shades of post-Lehman crisis? You are not far off the mark

Seoul/Hong Kong: Asian markets on Tuesday endured one of their most volatile days since the height of global financial crisis three years ago as margin calls forced traders to dump risky assets before bargain hunters and state investors swooped in to stem hefty losses.

Sparked by a 6.7 percent fall in the S&P 500 Index overnight and signs that global growth was sputtering, Asia stocks tanked at the open and quickly spiralled lower on indiscriminate selling. “I have butterflies in the stomach. It drove me crazy watching the market moves, they were so fickle,” said Shawn Oh, a market strategist at Daishin Securities in Seoul.

South Korea’s KOSPI slumped close to 10 percent at one stage, its biggest slide in two years, as brokers demanded investors sell stocks or stump up more cash to cover potential losses. “Retail is very important in Korea, and huge margin calls have been kicking in, so there have been forced sellers for retail,” said an analyst at a foreign brokerage in Seoul who could not be identified due to internal company policy.

“I was really scared by the slump …. It’s impossible for any investor not to panic,” said Robin Lu, a 37-year-old who runs a translation business. Lu said he sold one-third of his 100,000 yuan ($15,500) stock portfolio on Monday.

“The tumble has changed my conviction on long-term investment, as the trend has obviously been changed for the worse,” said Lu, who has been investing in stocks since 2006. “The market these days bring back memories of the market meltdown during the 2008 crisis, which taught me the importance of cutting losses decisively.”

Some Asian mutual funds were also seen dumping shares on expectations that investors will pull out what’s left of their money in an effort to preserve capital. The rout spilled into foreign exchange, commodity and money markets, at one stage thumping the Australian dollar down as much as 3 cents versus the US dollar and pushing it below parity for the first time in five months.

“It’s very illiquid out there. We are still assessing the shock value of the fall in equities on fx and fixed income…,” said the head of a desk at a European bank in Asia, as the selling peaked mid-morning. “There is a broad sense of systemic risk here. This is completely uncharted territory.”

Japanese foreign exchange margin traders took a bath as stop loss orders hit cross rates include the Aussie/yen and South African rand/yen. Traders in Reuters’ Dealing Room chatroom kept a stunned silence for the most part, punctuated with the occasional “nutty”, “wow” and “what’s going on?”.

Back from the brink

Just as a total meltdown loomed, heavyweight investors, including state funds, stepped in to staunch losses. Blackrock, the world’s biggest money manager, was one of those looking for bargains in the wreckage.

“Gold and bonds are doing really, really well and we’re making profits on them and putting these into the asset classes that are getting cheaper and cheaper, which are definitely equities,” James Holt, investment strategist at Blackrock in Sydney told Reuters in an interview.

Korea’s state funds also stepped in to support the market, buying 505 billion won ($466 million) worth of shares, though that was dwarfed by selling by foreign investors as the KOSPI closed 3.6 percent lower. Korea’s bourse operator suspended programme trading for five minutes to try to stem losses, while the country’s top financial regulator imposed a three-month ban on stock short selling.

While policymakers from Sydney to Tokyo and Seoul kept up efforts to soothe jittery investors, rumours of emergency measures from the Federal Reserve Open Market Committee (FOMC) at Tuesday’s meeting also played a part in halting the bloodbath, at least temporarily. “Talk of government funds buying stocks in Korea, Taiwan and Australia seems to have supported the markets. A lot of these indices are deeply oversold,” said Tom Kaan, a Hong Kong-based director at Louis Capital Markets.

“But all eyes are on the FOMC right now for some sort of credible stimulus. If that isn’t forthcoming, then I expect some real money hanging on to longs bailing out.”

Volatility rattles

Australia’s S&P/ASX 200 index, already down 11 percent over the past week, fell as much as 5.5 percent during the session before rebounding to close more than 1 percent higher. “Not even in the global financial crisis did we see this extraordinary volatility,” said RBS Australia’s head of Sydney sales trading, Justin Gallagher.

In China, where the Shanghai Composite ended flat after falling as much as 3.5 percent on top of a 3.8 percent fall on Monday, retail investors were rattled.

Not all market participants were fazed by the volatility. In Tokyo, which has endured a succession of natural and financial disasters, traders were more sanguine. “It’s not panic selling yet. You’re not seeing all investors puking. It’s very orderly selling in a sense,” said a trader for a U.S. brokerage based in Tokyo who did not want to be identified.

Some players even welcomed the wild ride. “These are great moves for bulls and bears today if you held your nerve and were prudent on the size of your positions,” said Geoff Last, a market veteran of more than 30 years and head of Institutional FX at AXI Trader, an Australian forex broking firm. “It was amazing, crazy stuff … one remarkable day.”

But with European markets giving up early gains and major indexes there falling as much as 6 percent, traders and investors were reluctant to call an end to the mayhem.

“We are getting a feeling that we are not out of the woods yet,” said a head of sales at a Honk Kong -based hedge fund.

“We are advising our clients to stay out as much as possible and take profits on any rallies. This is not normal market behaviour.”

Reuters