'Tectonic Plate Shift' for Markets on Fed Fears
Japanese stocks plunged 9 percent from their intra-day highs on Thursday as weak Chinese data added to growing fears that the U.S. Federal Reserve may withdraw its bond buying sooner than expected, with one analyst calling this a seismic shift of tectonic plates for the markets.
"I think yesterday may well be a turning point...the inevitable 5-7 percent correction. I think yesterday marks a very important turning point for the markets. Anybody who was expecting to see even higher stock prices might well be a bit disappointed going forward," Dennis Gartman, the founder and editor of The Gartman Letter told CNBC Thursday.
"Yesterday was a tectonic plate shift between the feet of the market...reversal day in the stock market, reversal day in the bond market, very strange movement in the foreign exchange markets. I think yesterday was an extremely important trading session and many many things shifted and changed."
(Read More: Nikkei Closes Down Over 7% After Volatile Session)
Nearly all Asian markets sank by over 2 percent in afternoon trading with the Nikkei closing down over 7 percent, its sharpest loss since March 2011. China's Shenzhen Composite Index was relatively untouched despite the market fright occurring after weak economic data from the country. HSBC's latest flash reading of factory activity showed a slip below the boom-and-bust level of 50 for the first time in seven months.
The trading volume on the Tokyo Stock Price Index (TOPIX) hit an all-time record at around 6 a.m. London time with a volume of 6.59 billion shares. The second-largest securities exchange in Japan, the Osaka stock exchange, briefly suspended trading in Nikkei futures at roughly the same time.
Meanwhile, European markets fell sharply lower on the open. The U.K.'s FTSE was lower by 1.6 percent, the German DAX down by 2.02 percent and the French CAC sinking by 1.93 percent.
(Read More: Japan Bond Yields Spike – 10-Year Now at 1%)
Fed Chairman Ben Bernanke's testimony on Wednesday gave little new information, but markets were sent on a ride both during and after his speech. Investors were spooked further by the release of the minutes of the Federal Open Markets Committee later in the day.
The minutes from the Fed's April 30-May 1 meeting showed "a number of participants" expressed a willingness to scale back the central bank's $85 billion a month in asset purchases, perhaps as soon as June, if the U.S. economy picks up further.
The Federal Reserve's next meeting is on June 18-19.
"Mr Bernanke confused everybody for the first time yesterday, saying in my mind one thing before the joint economic committee, and another in the minutes," Gartman said.
(Read More: Volatile Trading Day Keeps Focus on Fed, Jobs Data)
"Instead of thinking that QE (quantitative easing) would go on till 2014, probably sometime later this Autumn we will probably begin to see the tapering."
U.S. stocks and bonds, which had initially rallied on Bernanke's dovish comments, sold off when Bernanke was questioned about the unwinding of quantitative easing. Bond purchases could start to be pared back in a couple of months, Bernanke answered, which sent markets into a tail spin.
The Dow Jones Industrial Average fell 80.41 points, or 0.52 percent, to close at 1,5307.17. The lost 13.81 points, or 0.8 percent, to finish at 1,655.35. TheNasdaq dropped 38.82 points, or 1.11 percent, to close at 3463.30. Both the Dow and S&P were up as much as 1 percent earlier in the session.
That sparked selling across markets, including gold, which reversed its sharp gains. The 10-year Treasury yield closed above 2 percent for the first time since March.
Kit Juckes, the global head of FX strategy at Societe Generale said the sell-off wasn't about when the Fed begins to taper.
"[Rather] it's about too many positions on the same side of the boat and the danger of a capsize," he said.
"The prospect of low rates for a long time accompanied by even a tepid economic recovery encouraged investors and traders to buy yield and sell volatility. Those positions are very crowded and since the rate outlook is now uncertain (i.e. volatile) and a reduction in accommodation is inevitable, both positions will continue to be unwound over time."
Treasurys may bounce, pushing yields lower, Juckes said. But if they do, he believes, investors should sell U.S. government bonds.
—By CNBC.com's Matt Clinch; Follow him on Twitter @mattclinch81