London: World stocks added to the previous week’s losses on Monday, hugging one-month lows as investors pulled back from a more than seven month rally and prepared for the eventual withdrawal of stimulative monetary policy.
Wall Street, however, looked set for a positive start after Friday’s heavy losses on a day that also saw the VIX volatility index surge.
The dollar slipped against major currencies after enjoying its biggest weekly gain since early June.
Investors were bracing for a week of meetings at major central banks, including the US Federal Reserve and European Central Bank, the release of minutes from the past meetings of others and a G20 finance ministers’ meeting.
At issue in all cases is the future of the liquidity that has been behind much of this year’s financial market recovery, in the form of low interest rates and quantitative easing designed to pump money into the financial system.
“It’s central bank week,” said one bond trader.
News that CIT Group INC, a US lender to hundreds of thousands of small and medium-sized businesses, finally filed for bankruptcy on Sunday, also underscored the continuing fragility of parts of the financial sector.
World stocks as measured by MSCI were down 0.2%, adding to last week’s more than 4% loss, the largest since early March just before the rally began. Emerging market stocks lost 0.6%.
Wall Street’s favorite pulse of investor sentiment, the Chicago Board Options Exchange Volatility Index or VIX, rocketed 23.95% higher to 30.69 on Friday, the highest it has been since July.
In addition, cross-sectional volatility — or the volatility between stocks as opposed to just the index — has also been rising.
Some of this may be because of the time of year. Credit Suisse estimates that 22% of mutual funds end their fiscal years at the end of October, and those managers may have been selling last week to capture profits.
European shares hit a four-week low on Monday, extending the previous session’s sharp declines, but later recovered a bit. The FTSEurofirst 300 index of top European shares down 0.1% at. It fell 2.1% on Friday.
“Everybody is anxious and knows that the market went a little bit too fast,” said Koen De Leus, economist at KBC Securities.
Earlier, Japan’s Nikkei stock average fell 2.3% to hit a three-week closing low.
The dollar was lower against a basket of major currencies, but only after gaining more than 1% last week, its best performance since the week ending 7 June.
The currency has lost 6% this year as investors have deserted it for higher-yielding competitors and returned to non-US stock markets after last year’s flight.
The euro was up 0.4% at $1.4777 and the dollar lost 0.2% against the yen.
Euro zone bonds were mixed, with demand stronger for shorter-dated debt.