Following yesterday’s violent and unexpected equity selloff, driven by a so-called “tech wreck” as the FANG+ index dropped by 5.7%, the most on record, and stood on the edge of a key support line precipice…

… this morning, global stocks are predictably lower across the globe, as the tech sector fallout spreads across Asia and Europe…

… although S&P futures are off session lows, with 2,600 providing a support level for the time being, and should that fail, all eyes will be on the 200-DMA, some 15 points lower.

As noted yesterday, on Tuesday US tech shares suffered their worst drop since the February rout, as investors were spooked by bad news from companies including Nvidia, Twitter, and Facebook. As Bloomberg notes, the latest leg down for tech shares, which have been the driving force for much of the current bull market in global equities and represent the most popular investment for the hedge fund community, comes at a sensitive time. Stock markets trading with high valuations and tighter liquidity are already being shaken by protectionist moves by Donald Trump. His administration is mulling a crackdown on Chinese investments in technologies the U.S. considers sensitive, the latest step in his plan to punish China for violations of intellectual property rights.

The tech rout spooked Asia, where the ASX 200 (-0.7%) and Nikkei 225 (-1.3%) tumbled, while weakness in commodities also contributed to the glum. Elsewhere, KOSPI (-1.3%) pharmaceutical and metal stocks joined the tech underperformance after reports stated South Korea steel exports to US would decline 30% under the new trade agreement and that South Korea will amend its premium pricing program for pharmaceuticals to allow participation of US drug makers. Hang Seng (-2.5%) and Shanghai Comp. (-1.4%) were also dragged by the tech slide, while encouraging earnings from big 4 banks ICBC and China Construction Bank only provided brief support and was eventually engulfed by the stock rout.

Europe was no better, with equities (Eurostoxx -1.0%) extending the risk-averse tone seen in the US and Asia, triggered by a tech sell-off which prompted losses within the IT sector in Europe this morning, augmented by month-end flows. As such, semiconductors are the laggards with Dialog Semiconductors (-13.0%), Infineon (-4.0%), ASML Holding (-4.4%) and STMicroelectronics (-5.2%) the worst performers whereas utilities remain slightly supported. In terms of individual movers, Shire (+15.5%) is leading the FTSE 100 and lifting the healthcare sector (+0.5%) after Takeda confirmed to be considering an offer for the company.

Meanwhile, with most attention on equities, the big action overnight was in 10Y yields, where the growing tech turmoil forced 10Y yields out of the 20-bps range that’s held since early February. On Wednesday, the 10Y benchmark dropped as much as three basis points Wednesday to 2.74 percent, the lowest level since Feb. 6, following an eight basis-point drop Tuesday.

The yield has broken below the key 50-day moving average for the first time since mid-December.

Commenting on the move, FTN strategist Jim Vogel wrote in a note that for those caught off-guard by the extent of the bond rally, the shift is “still not alarming but definitely worth watching current rates if equities can’t find their way home. As various tech and social media stories continue to get pummeled on a regular basis, however, trading at 2.805 percent and below is gaining ground.”

It could get worse: as Mark Cudmore warned this morning, positioning in Treasuries signals a shakeout could be in the offing. As of last week, hedge funds and other large speculators had a net short position in 10-year Treasury futures that was the close to record highs. A break of technical levels like moving averages could shift momentum and lead them to cover their bets to protect from further losses. In this context, BMO Capital now expects 2.671% as the next level in sight for the 10-year maturity, which may pause at 2.752 percent. BMO earlier this month said they’re confident that yields already peaked for 2018.

Also notable, as Bloomberg points out it’s not just the 10-year maturity grappling with re-pricing. Eurodollars advanced by as much as five basis points on Wednesday, while the OIS market is now pricing in less than two Federal Reserve rate hikes for the remainder of the year.

In FX, just like yesterday, the USD has rallied against most G-10 peers again, with month/quarter end positioning still providing support, while the Yen is at session lows, with the USD/JPY trading just shy of 105.90 after overnight China officially confirmed that Kim Jong Un met with Xi Jinping and discussed the upcoming meeting with Trump and his eagerness to denuclearize the Korean peninsula.

GBP an early outperformer after reports of an imminent proposal on the Irish border issue. In addition to the summit between China and North Korea, the yen also weakened following news that Japan’s Takeda is hoping to acquire the now bigger Shire PLC.

All core fixed income markets well supported, UST 2s10s re-approach flattest level of the year. Crude futures hold overnight losses after bearish API data, spot gold weighted by USD rally.

Bulletin Headine Summary from RanSquawk

  • European equities have extended losses after tech slipped on Wall St. and Asia
  • USD firmer vs. all G10 approaching quarter and Japanese financial year end
  • Looking ahead, highlights include US GDP, PCE Prices, Pending Home Sales, DoEs and Fed’s Bostic
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