Welcome to your week. Take a deep breath.
– Another terrible night’s trade and a poor end to the week Friday as traders are clearly getting worried about the deterioration in sentiment on global stock markets. While some of the weakness has been laid at the feet of Microchip CEO Steve Sanghi’s warning of an “industry correction”, the weakness was across the board and across the globe. Indeed, it’s universal selling of stocks as European growth continues to deteriorate, the Fed warns of the impact of the US dollar on growth, investors worry about its impact on profitability, and there is a general mood of correction and taking cash from the table.
– As the great investment guru Kenny Rogers taught us, you gotta know when to fold hold ’em, fold ’em, walk away and, as is increasingly becoming the case, run. John Hussman picks up on a similar theme in his latest weekly missive.
– So at the close, the Nasdaq was down 2.34% to 4,276 after that semiconductor warning. The Dow fell 115 points or 0.69% to 16,544 and the broader S&P dipped 1.15% or 22 points to 1,906. The charts are looking very ugly.
– In Europe, there was also a sea of red with the FTSE down 1.43% to 6,340 and the DAX at it lowest level in a year, closing down 216 points or 2.4% to 8,789. That’s a long way from recent highs above 10,000. The CAC dipped 1.63% to 4,074 while stocks in Milan and Madrid dipped 0.94% and 1.19% respectively.
– The impact has been a terrible night’s trade on local futures markets with the December SPI 200 contract down 38 points to 5,119 just 25 points from the low of the year we saw in February. Iron ore staged an impressive rally however, so that might help at the margin, but not materially as the overall market struggles under the offshore weight.
– In Asia on Friday, it was also an ugly day’s trade likely to be replicated again today. The Nikkei was off 1.15% to 15,301, the Hang Seng dropped 1.89% and the Shanghai B index dropped 0.6% to 2,375. While offshore markets will drive trade today in the region there is some very important data in China this week with the release of new loan, trade and inflation data vitally important to views on its economic health.
– On Bond markets, the rally continues with US 10-year Treasuries down 3 points to 2.28%, German Bunds at 0.84% and UK Gilts at 2.22%.
– On Currency markets, the “risk off” feeling smacked the Aussie back to last week’s and this year’s lows. 0.8660 is the key level to watch but it would be unusual for the Aussie to hold if the stock sell off really gets going. The euro dipped back to 1.2623 but sterling is doing relatively well, although still down, at 1.6075. USDJPY is ready to break substantially lower and is at 107.63. It could move 2 to 3 big figures lower.
– On Commodities, there was a huge rally in iron ore with December futures up $1.79 to $80 a tonne. Newcastle coal continues to be buffeted by the Chinese tariff however, dipping another 45 cents a tonne for the December contract to $65.30. Crude settled at $85.56 a barrel, gold is becalmed in the low $1,220s at $1,223 and copper likewise is at $3.03 a pound. On the Ags, wheat popped 1.54% higher, but corn and soybeans were lower, dropping 2.79% and 0.67% respectively.
On the data front today, we’re waiting for a speech from Mario Draghi and it is the Columbus Day holiday in the US. New Loan data in China is scheduled to be released, as is trade – but these are sometimes fluid with their dates. There is nothing in Australia or the US.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Microsoft proved to be a bellwether for the recent stock market sell-off when, trading at 16.8 times forward earnings, it started to display technical divergence in late September.
Heavy selling on Friday has seen Microsoft arrive at another significant chart level in the form of potential trend line support. A third rejection of this line would be encouraging.
However, downward momentum remains strong and the RSI is still well above oversold (see box below the chart).If price does fall straight through this line, then Fibonacci retracement levels come into play. The 38.2% retracement is around $42.50 and, possibly most interesting of all; the 50% retracement coincides with the 200 day moving average around $41. At $41, Microsoft would be trading at a respectable 14.7 times estimated earnings and still well above its January low of $34.63.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC