Local stocks slid for a second straight day as foreign investors were rattled by steep Wall Street losses and opted to shift to lower-risk assets.
The SET index closed at 1,788.43 points, down 1.2% in heavy trade worth 125 billion baht. Turnover was the highest in value terms since the 130 billion baht seen on Oct 12, 2015.
Institutional investors were the largest net sellers of shares worth 4.4 billion baht, while foreign investors and brokerage firms sold 2.2 billion and 951 million, respectively. Retail investors were net buyers of 7.6 billion baht worth of equities.
On Monday, the benchmark index opened lower at 1,798.42 before recovering to close at 1,810.32.
The falling SET index was in line with plunging regional bourses as Hong Kong's Hang Seng index tumbled 5.1% and Japan's Nikkei 225 shed 4.7%.
The disarray in Asian stock markets came after the Dow Jones industrials and S&P 500 slumped by 4.6% and 4.1% on Monday, the biggest drops for the indices since August 2011, according to Reuters.
A sharp rise in US bond yields was the main factor triggering the global equity sell-off after upbeat data on US wage growth and hiring spurred fears of higher inflation and subsequent rate normalisation by the Federal Reserve.
Prinn Panitchpakdi, country head of CLSA Securities Thailand, said funds have shifted from high-risk assets such as commodities and emerging-market stocks to low-risk assets like the US dollar and gold.
Fund outflows from stocks and bonds in emerging markets are poised to continue for a while, Mr Prinn said.
"However, the US interest rate hike forecast at four times this year might not occur as expected," he said. "It could be reduced to three times if certain economic figures remain weak, especially the unemployment rate. This market correction can be read as a healthy correction, whereby Thailand's stock market and its Asian peers, which have strong fundamentals, could rebound."
Some stock markets in Asia, including China, India, Japan, Taiwan and South Korea, have dropped more sharply than the Stock Exchange of Thailand, as these were previous targets of investment by foreigners. As these investors shift their investment elsewhere, a sharp correction is the inevitable outcome, Mr Prinn said.
Tada Phutthitada, president of the Thai Bond Market Association, said Thai bond yields have had a minimal reaction to the foreign bond sell-off, as local institutional investors still have a high demand for government bonds, driving up the 10-year yield to about 4% yesterday.
Foreign net sales of Thai bonds were roughly 12 billion baht as of Feb 5, while year-to-date foreign net inflows were valued at 60 billion from a total outstanding amount of 800 billion.
Jaronvet Saksri, vice-president and investment consultant at Classic Ausiris Futures, said global gold prices in the gold spot market climbed to US$1,343 (42,304 baht) an ounce yesterday from $1,332 last Friday as investors sought to park money in a lower-risk asset class.
"The market is worried about a faster-than-expected [US] interest rate [hike]," Mr Jaronvet said. "Hence, all risky assets have fallen, especially equity."
Investment capital has moved into gold as a safe haven, he said.
Don Nakornthab, the Bank of Thailand's senior director for macroeconomic and monetary policy, said the US stock rout will have a minimal impact on the Thai economy, which has a strong foundation.
"The most important factor that people and the central bank are keeping an eye on is whether US wage growth will be temporary or permanent," Mr Don said. "If the trend continues, the Fed will raise the rate by 3-4 times [this year] as expected."