LONDON -- Stock markets around the world took a battering Tuesday, following a dramatic sell-off on Wall Street that triggered concerns that a potentially healthy pullback from record highs could morph into a more protracted crash.
Hopes that Wall Street won't repeat the scale of Monday's losses helped limit the selling during European trading hours. Futures markets suggested another, but more moderate drop, in the U.S., with the Dow and S&P 500 futures down 0.8 per cent and 0.2 per cent.
The market mood turned decidedly fearful on Monday when the Dow Jones industrial average posted its biggest percentage decline since August 2011, driven by fears the U.S. Federal Reserve will raise interest rates faster than expected due to a pick-up in wages.
That has fed into widespread concerns that markets were stretched following a strong run over the past year that pushed many indexes to record highs. Some also question the possible role of computer-driven algorithmic trading in the precipitous declines or even the ramifications of the rise and fall in the value of virtual currencies, notably bitcoin.
"If investors look at underlying earnings growth and the fundamentals of the global economy, there is reason for optimism," said Neil Wilson, senior market analyst at ETX Capital.
"However once this kind of stampede starts it's hard to stop."
Among the biggest fallers Tuesday was Tokyo's Nikkei 225 stock average, which ended 4.7 per cent lower at 21,610.24, having earlier been down a massive 7 per cent. All other Asian markets tanked, too, including the Shanghai Composite index, which closed 3.4 per cent lower at 3,370.65 and Hong Kong's Hang Seng, which skidded 5.1 per cent to 30,595.42. Australia's benchmark S&P ASX 200 slid 3.2 per cent to 5,833.30 and South Korea's Kospi declined 1.5 per cent to 2,453.31.
The selling has persisted into European trading hours, though at a more moderate pace. The FTSE 100 index of leading British shares was 1.9 per cent lower at 7,194 while the CAC 40 in France fell 2.4 per cent to 5,160. Germany's DAX was down 2 per cent at 12,433.
Though many stock indexes are close to where they started the year, the losses mark a reversal of fortune following a sustained period of gains, a pullback that some market pros have been predicting for some time.
Stephen Schwarzman, the chairman and CEO of financial firm Blackstone, warned recently of a potential "reckoning" in markets.
A 10 per cent drop from a peak is often referred to as a "correction" while a bear market is generally defined as a 20 per cent or so drop in indexes. The S&P 500, for example, is one of the major fallers, declining 7.8 per cent since its latest record high on Jan. 26.
"Seemingly the only hope for the markets at the moment is that investors suddenly decide that the sell-off has been a bit overdone," said Connor Campbell, a financial analyst at Spreadex.
Despite the sea of red in global stock markets, there are hopes that the retreat won't last long given that global economic growth has picked up and the financial system is more robust since the financial crisis.
"That is not to say that we won't see further falls in coming days, but in an environment where growth is good and earnings are expected to rise globally, there are decent underpinnings," said James Knightley, chief international economist at ING.
The catalyst for the latest sell-off came in jobs figures last Friday showing that wage growth in the U.S. was creeping higher. For many traders, that was a sign that the Fed will have to pick up the pace of its rate hikes -- higher wages have the capacity to fuel inflation.
On Monday, the Dow finished down 4.6 per cent at 24,345.75, while the S&P 500 sank 4.1 per cent, to 2,648.94. Falls like this have not been registered since August 2011 when investors were fretting over Europe's debt crisis and the debt ceiling impasse in Washington that prompted a U.S. credit rating downgrade.
Still, while some financial assets became more attractive to investors as perceived havens of value. Gold, for example, was up 0.4 per cent at $1,343 an ounce.
The U.S. dollar remained resilient despite the stock market sell-off, which at one stage Monday saw the Dow shed 1,597 points. The euro was up 0.3 per cent at $1.2435 while the dollar rose 0.3 per cent to 109.38 yen.
Kurtenbach contributed from Tokyo. Rod McGuirk in Canberra, Australia, and Mari Yamaguchi in Tokyo also contributed to this report
