Dow Jones plummets 350 points, drags on Footsie, Gilts surge, hedge-funds reel - UPDATE

The Dow Jones Industrials index briefly dropped by 350 basis points, or 2%, after the start of trading, with 10-year US Treasury yields having dropped below the 2% mark.

That sent the Footsie into a spiral. As of 14:48 the top flight index was down by 153 points to 6,240, with 10-year Gilt yields to be seen below 2%.

Data out before the opening bell showed retail sales dropped by 0.3% month-on-month in September, as auto sales fell by 0.8%, their largest drop in eight months. The value of gasoline station sales also declined 0.8% as a result of price declines.

Capital Economics economist Paul Diggle was at a loss to explain the weakness in underlying retail sales, pointing out that they were hard to square with the strengthening labour market. As such, "we expect sales growth to strengthen again before too long," they said.

Diggle later added that “At the margin, however, [Wedneday’s batch of US economic data] do provide some support for the Fed doves who would like to delay the first rate hike until mid-2015 or even later.”

In parallel, Greek long-term bond yields had been climbing throughout the morning and were to be seen over 80 basis points higher by the start of trading on Wall Street.

Not soon afterwards the Athens stock exchange’s main benchmark index would close 6.29% lower on the day.

Some observers also cited the possibility of the Abbvie-Shire tie-up falling through as a possible factor behind the selling. Indeed, the truth is that some hedge funds have probably already been left reeling from the recent volatility in global capital markets, whether in the US dollar or the price of oil.

Not coincidentally, overnight the Bank of International Settlements (BIS) warned that global financial markets are dangerously stretched and could unravel rapidly as liquidity dries up.

Precisely in that regard, in a note sent to clients market strategist Bill Hubard comments: “In our view, this reflects both positioning and pessimism on policy responses. Not only is a long USD theme dominant relative to the other investment stories (and there are quite a number to speak of!!!), placed in a historical context client demand has reached extreme levels. At just over $40bn of USD long positioning, this is at the peak recorded since 1995.”