Here's your 20-second guide to what Australian traders will be talking about this morning

Photo: Getty/Ryan Pierse

Quick Recap: The ASX 200 is set to open sharply lower this morning after a big night of falls in the US and Europe Friday. That saw the Dow drop 530 points and all three big indices in the US were more than 3% lower at the close. It was a similar story in Europe with big losses across the continent either side of 3% in the red. That left the SPI 200 futures down 110 points when it closed on Saturday morning. That suggests the ASX physical market will open around 2% lower this morning.

Of course the key butterfly that flapped its wings Friday, unleashing the stock market chaos and global market turmoil, was the much weaker than expected “flash” China PMI on Friday. But what the PMI data did was simply underscore the fears that have existed for some time about China, its growth, and economic growth around the globe more broadly, as well as company earnings and stock market PE ratios. Of course most people thought if the dam was going to burst it would be as a result of the Fed raising rates.

But, what we have here this morning is just another simple crisis of market confidence, an increase in risk aversion, and the associated position squaring which leads to the kind of heavy selling in stocks and buying in bonds, the Yen and the Euro that is currently taking place. We’ll have to see how it plays out in the days ahead.

Elsehwere the Euro is up near 1.14 and the Aussie dollar has lost 30 points this morning and is back under 73 cents. Gold is up near $1,160 and oil briefly dipped below $40 a barrel on Friday night and is at its lowest level since 2004.

The overnight scoreboard (6.52am AEST):

  • Dow Jones -3.12% to 16,459
  • Nasdaq -3.52% to 4,706
  • S&P 500 -3.19% to 1,970
  • London (FTSE 100) -2.83% to 6,187
  • Frankfurt (DAX) -2.95% to 10,124
  • Tokyo (Nikkei) -2.98% to 19,435
  • Shanghai (composite) -4.21% to 3,509
  • Hong Kong (Hang Seng)-1.53% to 22,409
  • ASX Futures overnight (SPI September) -110 to 5,057
  • AUDUSD: 0.7294
  • EURUSD: 1.1373
  • USDJPY: 121.89
  • GBPUSD: 1.5676
  • USDCAD: 1.3182
  • Nymex Crude (front contract): $40.45
  • Copper (US front contract): $2.3070
  • Gold: $1,158
  • Dalian Iron Ore (September): 442(it’s denominated in CNY folks)

Now the news. Last week’s move in markets was exactly the type of price action that you get after technical indicators such as the “death cross” in the Dow we highlighted the week before. Many might disagree and say, it was the Chinese data. But the effect of the China data was to force the hand of those who were already nervous because the underlying structure of the market has deteriorated over many months. You’d be right to say the death cross didn’t cause the selloff. However, what the lack of momentum in the market, which allowed the death cross to form, told us was that the bull/bear balance of traders was shifting. That meant bad news was likely to have more weight than it had in the past. That’s what has happened and we’ve had a week of big down moves. Here’s a snapshot.

– Two things are critical. One is that as Benoit Mandlebrot taught us, and I always write, volatility clusters. That means that even though we don’t know how bad this latest market funk might become, we do know that traders are likely to enter the market today worried about downside risk. That means they will trade with less conviction and smaller position sizes which in turn means lower liquidity on the bid and thus an easier path for the sellers. It also means we could get more of the types of moves we saw Friday. You end up with a negative feedback loop that Central Banks are often required to short circuit. It’s debatable if they can do that.

The other thing is that this selloff in stocks has a strong grounding in fact. Henry Blodget wrote a great piece over the weekend which is worth a look. But if I highlight just one thing he pointed out it was that 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.

– My trading self does not buy the panglossian rhetoric that says this is the “correction we had to have” because often it is simply a way for analysts to try to justify a market move they didn’t see coming. But equally my trading self doesn’t know just how big this is going to be. But, I went to cash far too early last year because I thought this was possible… I’m in the money at the moment but time will tell if this is the start of something bigger, perhaps much bugger. Equally though as I highlighted last week from a technical perspective the S&P 500 has just broken a huge technical level. It’s broken down and through the trendline supporting the QE rally from 2011. Here’s the chart.

– So fear is the most available emotion for traders as we kick off today and it is going to be a big week of data, news and events around the world. I’ve summarised it in my Diary of the week ahead for traders.

– One interesting thing that has happened, and may prove some sort of circuit breaker is that expectations of a Fed tightening in September have receded over the past week. But, to be frank, that simply reflects a fall in stocks so is more related to turmoil than a renewed appreciation for the Fed’s understanding of the US economy. But it would be reasonable for the Fed to now delay, even if they think they need to hike and even if the US labour market and overall economic strength seems incompatible with zero percent interest rates. We’ll get another GDP read and durable goods this week as a guide. Bond traders are betting the Fed will delay, or at least that inflation won’t be rising any time soon. Westpac’s Wellington based strategist Imre Speizer wrote this morning: “US 2yr treasury yields fell from 0.66% to 0.61% and the 10yr fell from 2.08% to 2.03%. US manufacturing PMI disappointed, Fed dove Bullard was optimistic on the economic outlook but undecided on a September hike, and WSJ Fedwatcher Hilsenrath appeared less confident about that date. Australian 3yr government bond (futures) yields fell from 1.90% and 1.81%, while the 10yr yield fell from 2.65% and 2.58%.”

– On commodity markets Gold has run into a bit of a wall here at $1,160 and Nymex crude found a little support under $40 a barrel on Friday night. Copper was lower and the CRB index overall dipped again, down 1.7% to close at 191.84, its lowest level since 2004.

– So it’s no surprise the Aussie dollar remains under pressure this morning. But, even in the time I’ve been writing it has rallied back above 73 cents from earlier weakness. It has held in well all things considered. The Euro and Yen are the standouts though in forex land. Of course whenever markets go into a funk the Yen, as forex traders’ safe haven, gets a bid. The Euro’s rally however is more about position squaring and is perhaps instructive of what has to happen before the market clears the current fear. More positions need to be closed as traders take risk off the table. Once that is complete markets can settle down.

– On the data front today there is nothing out of note in our timezone save for Japanese leading index. Tonight we get the Chicago Fed national activity index.

And now here’s Ric Spooner from CMC Markets with his Stock to Watch:

Ramsay Healthcare (RHC.ASX)

You know investors are in a bit of a funk when a market darling like Ramsay Healthcare falls below its 200 day moving average like it did on Friday. This hasn’t happened since February 2012.

Those looking on the bright side of the current correction as a potential opportunity to find some value in quality stocks, might have their eye on a couple of chart support levels for the private hospital operator which is due to report its results on Thursday. One chart support that looks as though it’s got a fair bit going for it is around $55.90/$56.30. Given current strong downward momentum this looks a chance of being reached. It consists of the 61.8% Fibonacci retracement; horizontal support through past highs and lows and a CD = AB x 127% projection.

If you think $56 might be a bit of a stretch, the $58.50/$59.00 zone also looks possible support at the 50% retracement and CD = AB level which intersect around the June low.

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