Stock markets didn’t crash last night but they were certainly under pressure and remain so at the moment as sentiment changes and fear is on the rise.
The fact that USDJPY solid off more than a big figure from the high above 110 and US 10 year Treasuries rallied more 10 basis points for a more than 4% capital move is all the news you need to confirm that this could be the start of something big.
So this morning you will read a lot of ex-poste rationalisation about the how and the why of the market sell off overnight. Many of these theories will seem plausible, but the reality appears to be that stocks, currency, bond and to a lesser extent commodity markets, are in the throes of a transition from low volatility to higher, perhaps even high volatility as Minsky, and I might humbly submit, I have warned.
This is a natural transition which has happened countless times over the years to greater and lesser extents.
This time however we have the reality that we face a known unknown which the market has to grapple with in the Fed exit from QE – that’s different to the usual normalisation of interest rates as an economy picks up and just adds stress and caution to traders actions.
All of this is why I’m still 100% cash in my super.
Anyway to the action overnight and it was a bad night to be long stocks which were under pressure from the get go as European traders sold heavily and US traders joined the fray once New York trading opened. It didn’t stop all day and the Dow closed down 238 points or 1.4% at 16,805. The Nasdaq dropped 1.59% to 4,422 and the S&P 500 was down 26 points or 1.33% to 1,946.
Close – the line hasn’t given way yet – but something to keep an eye on this is the QE infinity rally.
You can see why the disquiet is growing a little in stocks as the data front the past 24 hours has provided disappointment all around. In Australia yesterday the PMI and retail sales were a horrible combination suggesting a real need for rate cuts. Likewise last nights PMI’s in Europe were on the weaker side except for Italy which climbed back above the 50 expansion/contraction line. But the really bad news was the german print below 50. Then of course Mario Draghi seemed to pour cold water on the bond buying plan saying monetary policy cant do everything on its own and Europe has the worst possible outlook.
So it was no wonder the US started down but then the Markit PMI printed 57.5 against an expectation of 58.5 and 57.9 last. The ISM version dropped from 59 last to 56.6 in another sign that the US economy is cooling a little.
Turning to Europe and the FTSE fell 0.98% to 6,558, the DAX dropped 0.97% to 9,382 and the CAC was 1.16% to 4,365. In Milan stocks dipped 0.89% and stocks in Madrid fell 0.67%.
Locally the ASX defied logic and rallied strongly yesterday up 43.4 points or 0.8%. Overnight however the SPI 200 fell 35 points to 5286 – the market might struggle to defy logic and international leads for a 4th day in a row.
This is a classic technical set up. break, retest and now we’ll see where it all heads.
In Asia Chinese Golden week continues and the focus is still on the protest in Hong Kong with news this morning that there is talk of occupying government buildings. That is worth watching because while the aggressive approach of the weekend has changed such a tactic by the protestors will be hard for Beijing to ignore.
In Japan yesterday the Nikkei was down 0.57% and will likely be under pressure today after a big reversal in the Yen from above 110 against the US dollar on Tuesday night to sit this morning back under 109. It’s a normal reaction at times of risk off.
On currency markets the Aussie found support at the low of 2014 trading down to 0.8666 yesterday after the weak retial sales. It is substantially higher this morning however at 0.8727. This is largely a result of a weaker US dollar overnight after Draghi’s comments about monetary policy helped drive the Euro back above 1.26 to 1.2616. GBP is under the pump though after a big miss on the Markit PMI (51.6 against 52.5 last) – it sits at 1.6182 this morning.
As scary as it is I am long Aussie and short yen at the moment.
On commodity markets iron ore December 62% Fe futures up $1.40 to $78.88 a tonne. Newcastle coal for the same month rallied 15 cents a tonne to $65.55.
Elsewhere crude fell half a percent to $90.70 a barrel and on track for a move below $90. Gold rallied as the US dollar lost ground and is at $1,213 this morning and silver gained 0.59% to $17.16. Copper is up a little at $3.03 a pound. On the Ags wheat is largely unchanged, corn rose a little, up 0.12% while soybeans is up 0.17%.
On the data front in Australia we get HIA new home sales, building approvals and trade before an ECB meeting tonight in Europe. In Europe jobless claims are out along with ISM New York and factory orders.
Greg McKenna
NB: Please note all references to rates above are approximate
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