– The volatility in stocks continued overnight with Monday’s rally giving way to weakness as the Dow fell 140 points or 0.85% to 16,429. It had been down 200 points at one stage in the afternoon before recovering. The Nasdaq was 0.7% lower at 4,353 and the S&P 500 fell 19 points or 0.98% to 1,920. It’s looking wobbly on a technical basis.
– Key to the selling, at least the ex-poste rationalisation I have found most often, seems to be growing tension on the Ukrainian border with Russia but equally to me it’s just a continuation of growing uncertainty as the end of QE comes close and traders focus on valuations in a different interest rate environment. Last night’s ISM non-manufacturing PMI was another sign the economy is healing.
– Indeed Graeme Jarvis, Westpac’s Director of GCM Strategy said today he felt last night’s price action was “confirmation” of his view that markets are at a tipping point we reported on Friday.
– In Europe there will be catch-up this evening with the big markets of London, Frankfurt and Paris up 0.07%, 0.39% and 0.37% respectively. Giving credence to my enduring theme that we are seeing the asset allocation shift continue stocks in Milan fell 329 points or 1.62% while Madrid lost 142 points or 1.35%. At the same time 10 year bonds in both nations sold off 6 and 5 basis points respectively.
– Last night’s Markit services PMIs weren’t that bad and in some cases like Spain and the UK were actually quite good. Add in EU retail sales coming in double the 1.2% expected as a year-on-year rate and perhaps worries are the ECB will go another month without QE.
– Locally on the ASX futures market the September SPI 200 contract is off 33 points to 5,440 suggesting another bad day on the physical after yesterday’s weakness.
– Asia will do it tough today after last night’s price action. The Nikkei fell 1% yesterday to 15,320 while stocks in Shanghai were off a slight 0.15% to 2,220. There is not a lot of data out today in the region – except for Japanese economic leading index – so traders will have an eye on what the US did and what Europe will do.
– On currency markets the US dollar was stronger against the Aussie dollar and the Euro. The Aussie is down 0.35% to 0.9303 with Euro down a similar amount at 1.3375. Sterling managed to rally a little to 1.6881 while USDJPY is still resting in the mid 102.5 region.
– On commodity markets iron ore swaps for September closed at $95.92 tonne while September Newcastle coal leapt $1 tonne to $70.85 as the nascent recovery continues.
– Nymex August crude fell 63 cents Bbl to $97.66, while gold sits at $1,287 and silver $20.17. Copper fell 4 cents to $3.20 lb, wheat rallied 1.5% while both corn and soybeans fell 0.7% and 1% respectively.
On the data front there is nothing out of note in Australia but German factory orders tonight will be interesting as will house prices and industrial production in the UK. Mortgage application and trade are out in the US.
strong>And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Beware the Buy Back
A look at this chart would have a lot of technical analysts thinking of selling. After rejecting its 40 week moving average, Downer has formed the classic, flag formation. In these circumstances a break below the flag support is often looked at as a sign of ongoing weakness.
While Downer disappointed with its profit guidance yesterday, the engineering group also announced that it might buy back up to 10% of its stock. Readers will have their own views, but I am pretty cautious about momentum selling when a buy back is going on. You know there’s going to be a large player buying into weakness. There are usually better opportunities. The position here is clouded though by the fact that the buyback is only a maybe. If it can find a business to buy, Downer has said it will use part or all of its excess cash for this instead of buying back its shares
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC
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