2/28/2007: A Wakeup Call to Equity Markets
The S&P 500's decline of 3.5% yesterday was its worst loss for a day since March 2003. It wiped away the gain for 2007, leaving the index 1.1% underwater. The most commonly cited reason for the pullback was the 9% decline in China's local market the night before on fear that the government might move to clamp down on speculation. The currency markets may have also contributed. The yen spiked 2%, perhaps sparking concerns that the yen carry trade (borrowing yen at low interest rates to invest in riskier assets) may unwind. An unwinding of the yen carry trade could feed on itself and drag markets down. Bad economic news may have also played a role. Durable good orders were down 8% in January, which was far worse than expected. In addition, Alan Greenspan warned on Monday that a recession is possible. Clearly, investors became a little more risk averse yesterday. (The VIX index, which measures the implied volatility in S&P 500 option prices, spiked from 11% to 18%.)