Why global markets are in 'free fall'

Dow Jones decline

Now investors are anxious that inflation might pick up even faster, forcing the Fed to raise rates to 2.5 or even 3 percent this year. This was against the backdrop of a strongly rising trend thanks to very positive economic conditions and President Trump's business friendly policies. The inflation concerns escalated after Friday's monthly report showed that average wages surged 2.9 percent in January from 12 months earlier - the sharpest year-over-year gain since the recession.

Bond yields are rising as the Federal Reserve trims its US bond holdings.

"The magnitude of the selloff versus how far it's come really didn't raise any alarm bells in the stocks until the velocity picked up this afternoon", said Lou Brien, a market strategist at DRW Trading in Chicago.

Among other stocks, QualcommQCOM.O fell 4.3 percent after KGI Securities said AppleAAPL.O might drop the chipmaker in favor of IntelINTC.O as the supplier for modem chips in its next generation of iPhones.

A major selling point for equities since the financial crisis has been the higher yield of equities versus fixed income, with earnings considered the "yield" of a share of stock.

European stock markets reeling from an overnight sell-off in the United States and Asia were heading for the worst drop since the Brexit referendum this morning, jolted by investor fears about interest rates and government bond yields. But without fresh impetus the momentum fizzled, allowing bond yields to pull back. "It just looked like (the market) was overvalued".

"I think investor optimism got too far ahead of the fundamentals and looking at market valuations in conjunction with inflation, points to an overvaluation in the mid- to low-teens", said Stovall. Rising bond yields are also making bonds more appealing to investors compared with stocks. But notwithstanding periodic spikes, the rising trend in bond yields is likely to be gradual as historically it will take a while for inflation expectations to turn up significantly after a long downswing, the Fed is still likely to be "gradual" in raising rates and central banks outside the USA remain a fair way off monetary tightening.

Theoretically, when bond yield rises, the opportunity cost of investing in other assets, including equities, rises. That caused some on Wall Street to suggest the Fed could hike rates four times this year instead of the three that was expected.

Blackstone Group chief operating officer Tony James said in an interview on CNBC's Squawk Box Monday that stocks were "fully valued" and "you could easily see a 10 to 20 percent correction sometime this year".

But after shedding over one percent in the opening minutes of trading, the Dow Jones Industrial Average saw a partial recovery to trade a mere 0.5 percent lower approaching midday in NY. Roughly half the companies in the S&P 500 have given updates on their performance for the last three months of 2017, and 79 per cent of them have reported stronger revenue for the quarter than analysts expected, according to S&P Global Market Intelligence. They also have pushed investors into buying stocks by minimizing the interest payments from bonds. German 30-year bond yields were flat having touched two-year highs earlier at 1.429 percent.

"We expect the correction in Australia will be mainly felt in high flying areas like the resources sector as well as many lower quality smaller companies where we have seen excessive speculation". It's at its highest level since 2014. We have a stronger economy so the Fed should continue to tighten. But after Friday's robust report on jobs and wages, some economists think the Fed might accelerate its rate hikes.

The next move by the Bank of England on interest rates is likely to be up.

Tax cuts and their associated fiscal stimulus are likely to boost U.S. growth at least for the next 12 months. Over the past year, the greenback has slumped by more than 13 percent, even before Treasury Secretary Steven Mnuchin began talking the dollar down last week. The unemployment rate remained at a 17-year low of 4.1% for the fourth straight month in January. Surely that must be bad for profits?