The Australian share market has dropped around 1.5 per cent, following a steep fall on Wall Street overnight.
The benchmark S&P 500 US share index was down 1.2 per cent, as investors got nervous about potential delays in the Trump administration's planned tax cuts and healthcare changes.
It was the biggest one-day fall for that index since September last year.
Michael McCarthy from CMC Markets said the sell-off in smaller companies was even bigger than for the major firms.
"Overnight in US trading we saw an emergence from a period of very low volatility," he told ABC News.
"Market moves have been very muted and generally upward and yet we saw a reversal of that overnight as some participants worried about valuations and disruptions to the new US administration's plans to stimulate the US economy.
"That resulted in a substantial sell down in US markets. Most of the indices fell by more than 1 per cent, but it was the smaller and medium sized businesses that were hit very hard and one of the broader measures of the market was down almost 3 per cent."
The sell-off on Australia's market has been slightly worse than the US, with the benchmark ASX 200 index of large companies falling 1.6 per cent to 5,681 by 1:50pm (AEDT).
The broader All Ordinaries was off a similar amount to 5,729.
Big investors warn global markets overvalued
The retreat comes as a record number of the world's biggest fund managers believe equities are currently overvalued.
The Bank of America Merrill Lynch fund manager survey found 34 per cent of global investors said shares were too expensive, the highest reading in 17 years.
The US was identified as the most expensive region, with 81 per cent of those surveyed saying it was overvalued, compared to 44 per cent in emerging markets and just 23 per cent in Europe.
The survey covered 200 fund managers with around $US600 billion worth of assets under management.
BoA Merrill Lynch chief investment strategist Michael Hartnett said investors were now in a "bullish" holding pattern, with a pause in the risk rally likely to continue through next month.
Cash holdings edged down this month to 4.8 per cent of portfolios, still above the long term average, but not high enough to trigger a sell signal.
The biggest risks fund managers cited were European elections leading to the disintegration of the eurozone, followed by trade wars and a crash in global bond markets.
'Days or possibly weeks of selling' ahead
Mr McCarthy said a number of factors are contributing to the steeper losses locally.
"We're seeing particular pressure on Australian shares because, not only did shares fall overnight, but certain important commodities traded lower, including copper and oil, and today we're seeing pressure on iron ore prices," he observed.
Iron ore specialist Fortescue was down more than 5 per cent, while Rio Tinto was off more than 3 per cent and BHP Billiton down 1.5 per cent.
Woodside Petroleum had fallen nearly 2 per cent, while smaller rivals Oil Search and Santos were down 1.6 and 2.3 per cent respectively.
The major banks were also out of favour, with Westpac's 2.7 per cent fall the worst of the big four and NAB's 1.7 per cent slide the smallest.
One of the few companies in the black was Newcrest, with the gold miner up 2.1 per cent as investors sought safe havens.
Mr McCarthy said this is a pullback from elevated levels, which is a natural and normal function of the market, and could have a bit further to run.
"We're looking at corrective action," he said.
"Having said that, the pullback, as measured by the index, could be as deep as 5 per cent, so we could see several days or possibly even weeks of selling as markets readjust."
Currency markets also readjusted away from the Australian dollar, which had fallen to 76.6 US cents.
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