6 things Australian traders will be talking about this morning

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Stocks crashed at one point with the Dow down more than 500 points and the S&P 500 trading below the 2014 low.

But as the day progressed, stocks recovered and the Dow ended down ‘just’ 249 points and the S&P was well off its lows.

European stocks missed the rally and were down sharply with the FTSE off 3.46% and the DAX down 2.82%. For local traders on the ASX today, futures are suggesting a better day ahead with the March SPI 200 contract up 14 points.

A large part of the stock rout is the continued weakness in energy prices. In the past 24 hours oil has collapsed again with Nymex crude down 6.71% on the front contract. Given it expires at the end of New York trade, that suggests buyers were caught and had to exit positions. The second contract only fell 3%.

For all the messy trading in other markets, forex traders were more circumspect and the Aussie dollar is above 69 cents again this morning.

Here’s the scoreboard (8.10am):

  • Dow: 15,766, -249 (-1.56%)
  • S&P 500: 1,859, -21.35 (-1.13%%)
  • SPI200 Futures (March): 4,816, -14 (+0.3%)
  • AUDUSD: 0.6919, +0.0016 (+0.23%)

And the top stories:

1. It’s options expiry day on the ASX today. That’s good news. As if traders don’t have enough to worry about today with the selloff in US and European markets overnight, and the potential for more selling in Asia today, they’ve got options expiry day bringing its own level of volatility.

But David Scutt just told me that on the last two options expiry days, the ASX 200 has “rallied 2.13% and 1.46% respectively”. It’s also usually a volatile day and Scutty reckons there is a chance we could get a bounce today purely on the mechanics of the roll. Add in the US recovery from the lows and maybe, just maybe, it might be a better day. Even futures traders agree, with the SPI 200 higher this morning

2. Worse than 2007? Really? That’s the stern warning from William White, chairman of the OECD’s review committee and former chief economist of the Bank for International Settlements.

White is worried about the pile of debt that has been built up since the financial crisis. He also noted that while emerging markets were the panacea to the developed economic rout as a result of the GFC, they are now struggling under their own weight. And finally, central banks are impotent to do much about things when the music stops, as it seems to be doing now.

One thing worth noting. White’s comments echo those 10 scary words I noted earlier in the week – global growth is no longer enough to service global debt.

3. Two of the world’s biggest stock markets are testing massive support levels. The Dow was down more than 500 points at one point last night, while the S&P 500 was briefly trading through the low from 2014. It’s pulled back from the brink after the overnight recovery.

Myles Udland has Bespoke Investment’s thoughts on what it means for markets at the moment.

In Tokyo, the Nikkei is at a similarly critical juncture after it fell almost 4% yesterday. Here’s the chart I used in my AxiTrader Asia markets wrap yesterday. As I wrote from a trading perspective: “It’s not hard for me to see a drop of another 1,500 – 2,000 points if this level gives way.”

Nikkei Daily (Reuters Eikon)

A break in the S&P or Nikkei would be an ugly signal that the market’s trend is really moving onto Bear St. We have to see the break first though.

4. If markets are in a funk anyway, will China keep a lid on much-needed currency weakness? That’s the question lots of traders are starting to wonder about again. Westpac’s currency strategist Sean Callow wrote in a note yesterday that he has a sense of “deja vu” that the yuan’s weakness might be about to kick off again.

But whatever Callow’s sense of foreboding might be, it’s going to be the magnitude of the yuan’s weakness that is important to global markets in 2016. I’m with an ever-increasing crowd with a move to 7 pencilled in for later this year. But a hedge fund manager who nailed subprime is betting China will further devalue its currency “north of 50%”.

Cue the crashing cymbals of a stock market rout and emerging market debt implosion if that happens.

Oh, and while on China. Here’s a great chart by David Flanagan at Curve Securities showing Chinese growth looks headed to just 6%.

5. Emerging markets are getting hammered.Kazakhstan’s currency, the tenge, has been making new all-time low after new all-time low lately. It’s just one tiny currency amid a sea of emerging market exchange rates which are being hammered in the market rout of 2016.

That’s important because if central banks, and governments, fall into the trap of trying to protect their currencies’ values against these falls, they can very quickly run out of reserves and exacerbate the problems they face.

That’s what happened in the Asian crisis during the 1990s and markets fear it is happening again now. We know that because borrowing costs for emerging markets, essentially the compensation lenders want to lend money to these countries, are rising. The FT reports that “Emerging market borrowing costs hit their highest level in five years,” this week.

Bond markets feel like the Asian crisis, and all the denials about the need for investors to worry about stocks reminds me of the Nasdaq’s fall in the early part of the century. No one seems to be facing the truth.

To that point I offer this into evidence. There’s a good reason to sell and a bad reason to sell — people are selling for the bad reason right now.

6. The upside of downside is you have to face that truth, says George Soros. We have this story featured prominently on BI today but it’s worth noting Soros’ thoughts in the context of what is going on in global markets at the moment.

His key point is that “he looks at the dark side of things to find solutions”. The problem at the moment though, in markets at least, is two-fold. Denial remains right in a scary “she’ll be right” style of thinking and facing the problems is going to be difficult, as William White pointed out yesterday.

And now from CMC Markets’ Ric Spooner is today’s Stock of the Day

Sydney Airport (SYD: ASX)

What bear market?

Sydney Airport’s stock price is up 10% over the past week. Yesterday it announced that record 39.7m passengers had used the airport in 2015. There was a surge in December as airlines increase capacity. The weaker Aussie Dollar is also helping. International traveller numbers increased 4.3% to 13.7m while total passenger numbers were up 3% for the year.

From a chart point of view the next test for this stock will be the December high at $6.69. A move past this will imply that the stock is taking off on a new uptrend.

Ric Spooner, chief market analyst, CMC Markets

You can follow Ric on Twitter @ricspooner_CMC

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