A seismic shift in markets as stocks swoon, USD strength reverses, AUD & JPY rally

My theme for a while has remained that I didn’t trust the markets complacency and indeed I moved my super to 100% cash in April. It’s a call a few who know me questioned and laughed at but it was not a prediction of a crash just risk management and a move which allowed me to sleep at night. It’s in the money and I am in no hurry to get back into stocks yet.

Key to this is the global back drop and the fact that we might be seeing the start of the sell off. The Dow is down more than 100 points for the second day in a row and the much broader Russell 2000 index saw a big technical change in a “death cross.” Likewise S&P 500 futures closed weak breaking what looks like an important level on the charts.

Time will tell and the death of this bull run has be proclaimed amny times without any discernible change it what has been a very solid march higher for a number of years now. For the moment though with the US dollar gaining ground and markets shifting their outlook to higher rates the preconditions for a pullback seem to be growing.

Indeed the Aussie couldn’t hold onto its rally reversing course back to 0.8840 this morning, gold is still heavy at $1,224 and copper is back at $3.03 a pound. It’s all about the US dollar and its strength which is being driven by the outlook both for the US economy and the Fed’s interest rate policy.

The odds of a reaction back up to this fairly step downtrend look fiarly strong on this 4 hour chart and the key level to watch is 0.8887 and then 0.8900

Looking at the data flow last night you see reinforcement of the US economic might versus everyone else at the moment with the Richmond fed index rising to 14 from last months 12 and the US Markit preliminary PMI printing 57.9 versus 50.5 for Europe, an appalling 50.3 for Germany and a still weak 48.8 for France.

So at the close then the Dow was down 117 points for a fall or 0.68% to 17,056. The Nasdaq dipped 0.41% to 4,509 and the S&P 500 physical market lost another 11 points or 0.57% to 1.983.

In Europe the selling was more aggressive as the moribund state of the economy is apparent. At the close the FTSE was 1.44% lower to 6,676, the DAX fell 1.59% to 9.595 and the CAC fell 1.88% to 4,359. In Milan stocks fell 1.56% while in Madrid they were 1.33% lower.

The impact locally has been that the December futures fell 33 points overnight to 5,372.

In Asia yesterday Shanghai loved the better than expected preliminary PMI rising 20 points or 0.88% to 2,310. In Tokyo the Nikkei fell 0.71% when the USDJPY lost ground and in Hang Seng stocks were 0.59% lower.

On currency markets as noted above the Aussie is weaker again this morning having reversed course after the US dollar regathered its strength around 11pm last night. It was a solid US dollar move with the all the Majors coming under pressure from its surge. This morning the Aussie sits at 0.8846 after a high of 0.8925, USDJPY is back up at 108.85, the Euro is at 1.2849 while Sterling is bucking the trend to a stronger buck up at 1.6387.

On commodity markets iron ore rallied a little overnight with the December contract up 80 cents to $78.55 a tonne. Newcastle coal for the same month fell 40 cents however to $66.30. Elsewhere copper closed at $3.03 a pound. Nymex crude rallied 0.94% to $91.72 a Barrell while Gold sits at $1,223 and silver $17.77 an ounce. On the Ags wheat was largely unchanged, corn dropped 1.27% and soybeans were down 0.71%.

On the data front today the big item is one which usually passes without too much comment with the release of the RBA’s Financial Stability Review. There will be a lot of interest in any comments on housng, prices and any new rules or proposed control about lending. around the same time Westpac will release its China consumer sentiment release. Tonight in the US its new home sales.

Greg McKenna

NB: Please note all references to rates above are approximate

To learn more about Greg McKenna, read on here.