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USA markets drop sharply as investors are spooked by rising rates

11 October 2018

U.S. President Donald Trump said Wednesday's stock market sell-off was a correction that was long awaited, and that the Federal Reserve, which has been raising interest rates, has gone "crazy". "They're so tight. I think the Fed has gone insane", Trump told reporters on his way to a rally in Pennsylvania. "So you can say that well that's a lot of safety actually, and it is a lot of safety, and it gives you a lot of margins, but I think the Fed has gone insane".

Rising bond yields have been drawing investors out of the stock market, and the best-performing stocks over the past year took some of the biggest losses on Wednesday. A stock market correction is defined as a fall of at least 10 per cent from the high point of the last 52 weeks. Many observers expected that would trigger a sell-off in the stock market as investors flooded their cash into Treasurys.

The steep drop in Asia followed a decline on Wall Street of almost 830 points, the biggest fall since February, amid Trump's latest criticism of the Federal Reserve, the United States central bank.

Bourses in Paris and Frankfurt both lost more than two%, while London fell 1.3%.

The broad US stock market sell-off Wednesday took the S&P 500 to the lowest in three months, the Dow Jones Industrial Average plunged as much as 836 points and the Nasdaq 100 Index tumbled more than 4 percent for its worst day in seven years.

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The tech-rich Nasdaq Composite Index plummeted 4.1 percent to finish the session at 7,422.05, its worst fall in percentage terms since the surprise Brexit vote in June 2016.

"Clearly stocks are spooked by higher rates and maybe some inflation that seems to be creeping in", said Michael Farr, CEO of Farr, Miller & Washington.

He has frequently criticised the United States central bank for gradually raising interest rates, and on Wednesday reiterated his position: "I really disagree with what the Fed is doing".

Those programmes - such as quantitative easing - are now ending and the Fed has raised USA interest rates three times already this year, raising borrowing costs, and could add a fourth hike by the end of 2018.

"The Fed continues to flood the market with USA dollars", he said in one tweet.

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Last week's jump in yields followed strong U.S. data but many analysts have been anticipating a change in the dynamics in the bond market due to expectations that central banks in Europe and Japan will soon phase out bond-buying programmes.

Ivan Feinseth, Chief Investment Officer at Tigress Financial Partners, said that although the sell-off caught him off-guard, he thought many investors were unduly frightened by the prospect of rising rates.

"I believe this selling is an overdone panic", Feinseth said.

Trump was briefed on the market turmoil earlier in the day, a White House official said.

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