In Europe, a decade of extraordinarily low interest rates is coming to an end. The European Central Bank is winding down the money-printing program known as quantitative easing and could begin raising its benchmark interest rate — currently zero — next year.
That would have two impacts on the stock market. For one, companies — some of which have been able to issue bonds paying little or no interest — would have to pay more to borrow in the future, which could cut into profits.
At the same time, higher interest rates are making bonds more attractive as an investment, prompting investors to shift some of their money out of stocks.
“Gradually the realization is dawning that the era when monetary policy provided unlimited support to markets is coming to an end,” Michael Heise, chief economist of German insurance giant Allianz, said in a note to clients Tuesday.
An improving economic outlook has also meant European unions are demanding relatively hefty pay increases after years in which they settled for stagnant wages in return for job security. The IG Metall union in Germany, which represents workers at big companies like Daimler and Siemens, negotiated a new contract early Tuesday that provides for an effective annual pay increase of more than 3 percent through early 2019.
The contract applies only to workers in the state of Baden-Württemberg, in southwest Germany, but it will serve as a model for agreements in other German states.
Christian Hille, a senior fund manager at Deutsche Asset Management in Frankfurt, said that much of the selling was by investors compelled to move out of stocks for technical reasons — for example, because they manage a fund that has an obligation to limit losses to 2 or 3 percent.
“We think that the movement is a bit overdone,” said Mr. Hille. He predicted that stock markets would eventually settle down because of the strong global economy.
“We are seeing a synchronized global upswing, which will be supported by U.S. tax stimulus,” he said. “We expect higher corporate profits.”
Analysts digesting the numbers from Asia said they did not expect the selling to let up anytime soon.
“This is the beginning of a more meaningful setback in a market that was, at least from the nonfinancial sectors, very overvalued and there was a lot of euphoria,” said Jonathan Garner, an Asia and emerging markets equity strategist at Morgan Stanley.
“I don’t think this is a ‘one-day’ that finishes today,” he added.