Good morning, hope everyone slept well.
– Last night was a big night for markets with a continued sell-off in 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.
– On 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 night’s PMIs 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 can’t 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.
– There is 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, currencies, bonds 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 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.
– 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.
– 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.
– Bonds also confirmed the risk-off theme of markets with US 10s down a massive 10 points for a rally of 4.08% in terms of capital price. German 10s are at a stunning 0.86% and UK Gilts rallied 7 points to 2.86%.
– On Currency markets, the Aussie found support at the low of 2014, trading down to 0.8666 yesterday after the weak retail 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.
– On Commodity markets, iron ore December 62% Fe futures were 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 per cent 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. Silver gained 0.59% to $17.16 and 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.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Share traders may be in for an interesting few days. US markets had a pretty weak session as investors reacted to moderating economic data. Amongst other things, we may be seeing some prepositioning for the upcoming quarterly reporting season in the US. Investors are beginning to think about the potential impact of the stronger $US on some company earnings.
On the Australian market though, bargain hunters in dividend yield stocks returned with force over the last couple of days. This saw the ASX 200 index finish higher yesterday amongst a sea of red in most of the Asian time zone.
So it’s going to be interesting to see how these opposing forces play out.
Charts may help assess the situation. Woolworths, for example, had a really strong bounce off support and filled the gap created by Monday’s lower opening. This is a potentially bullish development, making this look like an exhaustion gap. As long as we hold above yesterday’s low, the potential that Woolworths and the banks have made a base (at least for a while) remains intact.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC