The message from this week’s sell off in global stock markets could not be clearer: The summer time rally, fueled by optimism over central bank stimulus measures, is now over and it’s time to brace for a period of renewed volatility and uncertainty, analysts say.
The S&P 500 index on Tuesday suffered its worst day in three months, while Asian stocks slumped on Wednesday, with Japan’s benchmark Nikkei stock index down 1.7 percent in early trade. The sharp sell-off and renewed concerns about Spain’s economy are likely to set the tone for European markets on Wednesday.
A retreat in global markets, which have seen stellar gains over the last three months, reflects a shift in sentiment among investors, analysts say. They add that now the world’s major central banks have unveiled steps to help their economies, focus has returned to the economic outlook, which remains weak in much of the world.
That means markets are expected to remain volatile heading into the final quarter of the year, with further selling in equities likely unless solid signs of an economic recovery emerge.
“The honeymoon period for markets is over. There is a realization that central banks have laid their cards on the table now and not much more can be done to help growth,” said Justin Harper, market strategist at IG Markets in Singapore. “Looking at the hard cold facts, economies globally are still struggling to recover. While markets remain toppy, more sell-offs could be on the cards as investors fail to find a new catalyst to drive equities higher.”
The European Central Bank (ECB) cheered markets at the start of the month when it outlined how it would help bring an end to the euro zone debt crisis with a plan to buy the bonds of those euro zone countries facing high borrowing costs.
Markets got another boost two weeks ago when the Federal Reserve unveiled an aggressive asset-buying planto boost the U.S. economy and revive employment growth, while the Bank of Japan surprised markets last week when it delivered its own monetary easing measures.
A new week, however, has bought of dose of reality back to markets. U.S. heavy equipment maker Caterpillarspooked markets after it said on Monday that sluggish global growth prompted it to cut its profit outlook. (Read More: What Caterpillar's Profit Warning Means for Global Growth.)
Protests in Spain on Tuesday against unpopular austerity measures, meanwhile, act as a reminder that the euro zone’s debt crisis is far from over.
“What we’re seeing is a bit of (negative) headline news and volatility is back in the market place,” John Hailer, President and CEO at Natixis Global Asset Management in Boston told CNBC Asia’s “Squawk Box.”
“The truth is that we have our own problems in the U.S. — we still don’t see jobs growth. So without jobs growth, with the issues in Europe and the Chinese economy, we have a bunch of things happening that are forcing volatility back into the market,” he added.
The U.S. unemployment rate, which stood at 8.1 percent in August, has remained stubbornly high and analysts say a sustained fall in the rate is one thing investors, who appear to be moving to the sidelines, will be watching out for before they move back into equities.
“There’s too much uncertainty for investors at the moment so many are sitting and waiting,” Jill Cuniff, portfolio manager at Edge Asset Management in Hong Kong, told CNBC on Tuesday.
Some analysts believed that despite the volatility, there were some bright spots investors should keep an eye on.
“There have been bright spots in the U.S. economy and there is an interest in investing in the U.S. … there are also signs that the housing market has bottomed, so that is positive,” Cuniff said.
Bhaskar Laxminarayan, chief investment officer at Bank Pictet and Cie, told “Squawk Box” on Wednesday that stimulus measures from central banks will provide support for Asian equity markets.
Shares in the region have gained about 15 percent since early June, but are off almost 2 percent from four-month highs hit last week.
“Risk is certainly back to a certain extent. But the fact is that so much liquidity is being pumped in, so we should see equities rally for a while,” he said.
Laxminarayan added: “I think that is supported by the fact that a lot of tail risk has been taken out by Draghi’s talk, stronger action then we’re used to from the Fed and the (U.S.) housing market is bottoming out,” referencing a pledge by ECB President Mario Draghi in late July to do whatever it takes to save the euro area from collapse. Those comments helped trigger sharp gains in global stock markets.
“But we are in wait-and-see mode for now,” he said.
—By CNBC's Dhara Ranasinghe