US markets tumbled overnight, and the reaction in Asia has been to sell. Shares globally are being hit by expectations of higher inflation and rising rates. The S&P 500 is down 10% since January, putting this market officially in correction territory. The Hang Seng Index is down 10% this week, and the Topix is off 7%.
The number of Americans filing for unemployment benefits has reached a 45-year low, fueling expectations for higher wages. This has put rate rises back on the table with central banks around the world either boosting rates or talking about ending a stimulus that has been in place since 2008. The Fed funds target rate, a key variable driving the global cost of funding, is expected to double by 2020.
But this is the official reason for the selling. Unofficially, people are just nervous about the high levels and have been waiting for a reason to exit. The Hong Kong market has been on a two-year bull run and was recently at record levels, as were US stocks.
The Topix has been at its highest levels since the Japan economy blew up in the early '90s. Many people have made a lot of money from recent share gains and have wanted to lock in the returns by selling to get in front of a sell-off. Traders in Asia know markets are volatile, and the most euphoric markets can turn to crisis over a weekend. We've seen this many times before. As a footnote to current events, the last time Hong Kong was at the current levels was in 2007 or just before the global financial crisis toppled worldwide markets.