Last week was one of those that traders hate. Almost everything except gold and the Euro fell heavily and the week ended with a crushing 530 point loss on the Dow.
That saw the Dow close the week at 16,459 – down 5.82%. The S&P also came under heavy selling pressure Friday ending the week down 5.79% below a four-year trendline, and looking wobbly. The Nasdaq finished trade Friday a little worse for wear as well with a 6.77% drop on the week.
It sets up a horrible start to the week for local traders with the September SPI 200 futures down an incredible 110 points, more than 2.12%, to close Saturday morning at 5,057. Adding that to the 2.65% loss on the physical in trading hours between Monday and Friday implies the ASX (physical plus futures) lost 4.67% on the week.
While the release of weaker than expected Chinese economic data Friday gets the blame as the most obvious catalyst for the latest move, the reality is that the underlying fabric of stock markets has been weakening for some time now.
As Henry Blodget pointed out over the weekend compared to the cyclically adjusted price-earnings ratio of the S&P 500 for the past 130 years, today’s PE ratio of at least 26 is miles above the long-term average of 15.
“In fact, it is higher than at any point in the 20th century with the exception of the months that preceded the two biggest stock-market crashes in history,” Blodget wrote.
Even Rupert Murdoch tweeted on Friday morning “the world is on the brink of another global crisis.”
This all makes the convergence of weak Chinese economic data, worries about the outlook for the US and other economies from global business leaders such as Murdoch, and traders’ fear that the selloff many have been anticipating is now here, a powerful convergence of negative forces in stocks and across global financial markets.
Fear is the most available emotion for traders right now. From a behavioural psychology and finance point of view we know that the availability of this emotion means that this week is likely to open with more downside pressure on stocks, oil, commodities the US and Aussie dollars.
That’s important because these types of moves can often feed on themselves and there is just enough data and events in this last week of the month to keep traders on edge.
The NAB’s economics team said on Friday that in Australia:
The data flow starts to picks up again this coming week, with the release of two important quarterly investment partials ahead of June quarter GDP on 2 September. These are Construction Work Done on Wednesday and New Private Capital Expenditure (Capex) on Thursday. Outside of these releases are Producer Prices on Tuesday and the second tier weekly ANZ-Roy Morgan Consumer Sentiment and the Conference Board’s leading indicators.
There are also remarks from RBA Governor Glenn Stevens at a National Reform Summit on Wednesday.
It’s the release of these partial indicators of GDP, especially Capex, which are likely to be the highlight for traders wondering about Australia’s economic transition. The NAB said “a pick-up in non-mining investment intentions remains the missing piece in the transition of the Australian economy towards non-mining led growth.” Back in March, this data was so weak that UBS described it as “recessionary”. So the update will be vitally important for the Aussie dollar and forex traders.
Offshore China has a light week with only the release of the PBOC leading index Tuesday, Westpac-MNI consumer sentiment Wednesday and industrial profits on Thursday. But traders will be watching Shanghai stocks, the RMB and any stimulus measures, if they come, from the PBOC.
ON Monday in the US we get the release of the Chicago Fed national activity index after Japanese leading indicators earlier in the day. Atlanta Fed President Lockhart is also speaking Monday night.
Tuesday sees the release of German Q2 GDP and IFO business survey as well as the Case Shiller house price index in the US, new home sales, Richmond Fed manufacturing and consumer confidence all due.
Wednesday the Kiwis will be releasing their trade data and the super-important durable goods orders will be out in the US, along with a speech from New York Fed President Bill Dudley. Thursday the Fed’s Jackson Hole symposium on Inflation Dynamics and Monetary Policy will be of acute interest to traders given the backdrop of the big fall in crude and the impact this is having on expectations of the Fed tightening in September (which after the big fall in stocks Friday, that expectation has fallen to 35%).
Indeed as Akin Oyedele from BI US wrote Friday “in just one week, everything changed for the Fed.”
Thursday’s big releases are also in the US with the latest read of US GDP, along with personal consumption expenditures, jobless claims and pending home sales.
Friday is a big day in Tokyo with retail trade and CPI out. They follow last week’s much weaker than expected GDP release which showed Japanese GDP falling at an annualised rate of 1.6%. Jackson Hole is continuing while in Europe we get German retail sales, CPI, EU business climate and sentiment and UK GDP. Then the big one will be core personal consumption data in the US.
It’s a big week.
Here’s Westpac’s excellent calender of all the key data and events.