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More volatility ahead as investors take in jobs data and Fed rate impact

The reason for the latest October crash is the realisation of longstanding market fears about interest rates and tariffs.

US stocks plunged last week, and more volatility this week ahead of a key jobs report will make this another infamous October to remember.

In 1929, 1987 and 2008, it was the month of October when the most brutal selloffs struck.

This year, the broad Standard & Poor's 500 is down nearly 9 per cent for the month, and, if it finishes any lower, would suffer the biggest loss in any month since October 2008.

"October is known for volatility, and we've sure seen it so far," said Ryan Detrick, a senior market strategist at brokerage LPL Financial. "In fact, by many measures, (this) October is poised to be one of the worst months in years. The S&P 500 Index has had two separate six-day losing streaks this month for the first time in history."

Last Wednesday, the Dow Jones Industrial Average fell by more than 600 points, one of its biggest point losses ever, to finish in the red for the year, below 25,000.

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While the percentage swings are not as dramatic, 3 per cent of 25,000 represents more money than 3 per cent of any historical Dow value, said Joe Kinahan, chief market strategist at TD Ameritrade.

A 500-point rally last Thursday was almost wiped out by a 300-point drop a day later.

The reason for the latest October crash is the realisation of longstanding market fears about interest rates and tariffs.

Construction and mining machinery maker Caterpillar warned that tariffs were set to drive up the cost of raw materials. Another manufacturing giant, 3M, warned that demand was slowing in China.

Housing data released in midweek showed a marked slowdown in sales in September, as higher mortgage rates depleted sales.

Higher US Treasury yields have also damped risk appetite, causing a plunge in technology stocks.

Last week, the FAANG stocks - Facebook, Amazon, Apple, Netflix and Google parent, Alphabet - the high-growth, high-risk superstars of the bull market were among the biggest losers after Amazon and Alphabet reported growth rates that were below Wall Street expectations.

A disappointment from Apple, the last of the group to trade near all-time highs, could be the nail in the coffin for the bull market in tech stocks.

Ron Temple, the head of US equity for money manager Lazard Asset Management, said he was still "optimistic" on the outlook for the US stock market, but more cautious than he had been earlier this year. His caution was inspired by an apparent shift in Federal Reserve policy.

"I think the market is still under appreciating the shift on how hawkish the Fed is becoming," he said.

Fed funds futures markets, where traders hedge risk on changes in central bank benchmark rates, are pricing in a 3 per cent rate for next year, which still does not reflect the official central bank target of 3.25 per cent, Mr Temple said.

"What makes me not unambiguously optimistic is the 2017 tax cuts and 2018 fiscal spending," he added. "I think that untethered the Fed, and allowed a lot more latitude to raise rates."

To some extent, the question that has hovered over the global market since former Fed chair Ben Bernanke began the extraordinary experiment with effectively zero-per cent interest rates in 2008 is still an open one: Can global stock markets stand on their own two feet, once the crutches of low interest rates are removed?

The rapid increase in Treasury yields in September not only had repercussions for the US housing market, it destabilised currency and bond markets worldwide by strengthening the US dollar.

The weakening of the yuan is one of the reasons that Chinese stocks have been among the hardest hit in the global rout, with Hang Seng and Shanghai Composite indices in bear-market territory.

The other reason is the slowdown of the Chinese economy and the fear that the trade war with the US will cause it to slow further.

Last week, Treasury Secretary Steven Mnuchin dismissed the idea that China's slowdown could have "contagion" effects on the US economy and markets.

In the US, growth is still above-target, with a 3.5 per cent rate in the third quarter, according to the Commerce Department.

Should Apple echo 3M's warning about demand in the key market, however, investors may start to wonder whether US President Donald Trump's trade war is backfiring.

"China is not only a big economy, but it is also the world's third-largest importer," said economists at brokerage Bank of America Merrill Lynch Global Research, in a note to clients.

"Over time, negative shocks to China are having bigger impacts on global equity markets, commodities and sentiment."

Jobs data that will be released later this week could alleviate the downward pressure on US stocks, with expectations that the strongest labour market in roughly half-a-century will continue growing.

But one strategist said corporate outlooks from Facebook, Apple, and carmaker General Motors and others would remain the biggest factor.

"I still think it's an earnings-driven market," said Mr Kinahan of TD Ameritrade. "We saw this with Amazon. If they don't guide higher, the stock doesn't go higher. If they guide higher, it's going to go immediately higher."

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