Traders Risk 'Burned Fingers' as Wall Street Preps for Ugly Open

(Bloomberg) -- The global carnage spurred by the trade war is far from over.

Wall Street is bracing for an ugly open after a Monday sell-off in risk assets swept across Asia and spilled over to Europe. With European stocks poised for their worst two-day drop in three years and investors charging into safer assets, the turnover of S&P 500 futures is spiking as traders gird for the next phase of the rout.

The cause of all this is yet again the trade war. Bloomberg reported that the Chinese government has asked its state-owned enterprises to suspend purchases of U.S. agricultural products, the latest move in a protectionist flare-up that has quickly erased any talk about the “everything rally” of 2019. The Asian nation’s currency also weakened past 7 per dollar amid speculation Beijing is allowing the yuan to depreciate to counter President Donald Trump’s tariff threats.

“I bought too early last week and it was a mistake,” said Guillermo Hernandez Sampere, head of trading at asset manager MPPM EK, who bought European stocks on Thursday and suffered losses. “The sell-off burned my fingers last week. Both I and markets are in a very bad mood.”

Nonetheless, Sampere says he’s buying again as he takes advantage of the rout.

Futures on the benchmark U.S. equity gauge slumped as much as 1.6%, and were 1.3% lower as of 8 a.m. in New York. West Texas crude dropped to about $55 per barrel, gold surged and 10-year Treasury yields slid to their lowest since October 2016 on a closing basis.

“I think investors are now really scared for the first time since the beginning of the year,” said Alberto Tocchio, chief investment officer at Colombo Wealth SA, who is currently looking at European oil stocks as a possible buying opportunity. “The great performance for this year is already behind us and the aim for the next months is to take a defensive stance in order to preserve the positive performance.”

Volatility in both European and U.S. stocks on Monday certainly hinted at signs of panic not seen since the start of the year, when markets were recovering from the violent fourth-quarter sell-off. Both the CBOE VIX Index and Europe’s VSTOXX gauge surged to January highs on a closing basis.

The biggest gainers among U.S. exchange-traded funds with more than $500 million in assets also signaled that investors are bracing for a jump in price swings and further declines. The VelocityShares Daily two-times leveraged VIX fund gained 13% and ProShares Ultra VIX Short-Term Futures was up 10% in pre-market trading.

The threat to global growth from the trade spat and the yuan’s devaluation are reverberating across the world. Emerging-market equities tumbled, taking their losing streak to a ninth day -- the longest since December 2015.

The search for safety was most prominent in Japan, where the yen hit its strongest level since early January and 10-year government bond yields touched the lowest since July 2016.

“The U.S.’s imposition of the fourth round of tariffs on Chinese goods may indeed prove to be a game changer,” said Masanari Takada, a cross-asset quant strategist at Nomura Securities Co. Ltd., citing the potential damage to market fundamentals.

--With assistance from Dani Burger.

To contact the reporter on this story: Ksenia Galouchko in London at kgalouchko1@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Samuel Potter, Sid Verma

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