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

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Quick Recap: There was some small hope after yesterday’s heavy selling in Asian stocks that cooler heads might prevail when US traders entered the fray last night. Europe was always going to follow the Asian lead but when the Dow was down 1,000 points at one stage, all hope was lost.

The Aussie dollar fell to a low of 0.7058, USDJPY fell 5 – yes 5 – big figures to a low of 116.46 and US 10-year Treasuries fell to 1.90%.

The subsequent rally in the Dow, Nasdaq and S&P reversed some of these moves but with losses of close to 4% in US stocks, and more than 5% in European stocks, it looks like we are faced with another day of market tension, fear and most likely more selling. That sets up a big day for the ASX with the SPI 200 futures presently indicating the market will open down around 200 points.

Key to the outlook will be what happens in China and what President Xi does, or tries to do about the massive capitulation of Chinese stocks. Will they be passive today? Unlikely, would be my GUESS.

Elsewhere oil crashed again, commodity prices hit their lowest levels this century and everyone is ignoring gold again.

The overnight scoreboard (7.07am AEST):

  • Dow Jones -3.57% to 15,871
  • Nasdaq -3.82% to 4,526
  • S&P 500 -3.94% to 1,893
  • London (FTSE 100) -4.67% to 5,898
  • Frankfurt (DAX) -4.7% to 9,648
  • Tokyo (Nikkei) -4.61% to 18,540
  • Shanghai (composite) -8.46% to 3,210
  • Hong Kong (Hang Seng) -5.17% to 21,251
  • ASX Futures overnight (SPI September) -189 points at 4,761
  • AUDUSD: 0.7152
  • EURUSD: 1.1609
  • USDJPY: 118.42
  • GBPUSD: 1.5771
  • USDCAD: 1.3286
  • Nymex Crude (front contract): $38.09
  • Copper (US front contract): $2.2545!!!
  • Gold: $1,154
  • Dalian Iron Ore (September): 428 (it’s denominated in CNY, folks)

Now the news. The last 24 hours, indeed the last three trading days, have been a great example of how markets can feed on themselves. It’s what happens when fear takes over. Fear is of course a manifestation of uncertainty, about the markets, the economy, traders’ pocket books, and investors’ portfolio balance.

But once it hits the tipping point it becomes not the manifestation of uncertainty, but the catalyst for the uncertainty. That sets up the type of negative feedback loop that we are seeing in markets now and we’ll see in Australia today. Traders left the ASX down 4% yesterday and would not have expected they faced a similar loss today. Otherwise they would have sold more heavily. Yet that’s exactly what the SPI 200 futures are suggesting with an overnight loss of 189 points at the moment.

The question for traders though is whether last night was the type of acute weakness, what I like to call a pessimistic crescendo, that can see prices reverse. Given the Dow climbed back from 1000 points down, it just might be. But Goldman Sachs says we might still have another 6 weeks of turmoil before China stabilises. Can the developed world stabilise if China is still burning?

– The answer to the question of whether it was a pessimistic crescendo might come from Rich Barry, a floor governor at the NYSE. Myles Udland from BI US wrote this morning that Barry “saw Monday’s market action as a capitulation”, which he defined as when “investors give up any previous gains in stock price by selling equities in an effort to get out of the market and into less risky investments. True capitulation involves extremely high volume and sharp declines. It usually is indicated by panic selling.”

It’s hard to disagree, given the speed of the Dow’s crash. Here’s the chart:

investing.com – Dow Daily Chart

– So there is a real prospect of a near term bounce in markets over the next day or so. But as John Hussman pointed out again yesterday stocks have been overvalued for ages. We were just waiting for a catalyst for the recognition, and the selling to kick in. He reckons the wheelbarrow full of dynamite has now been rolled amidst the fire-eaters. He’s looking for a 40%+ decline in the long run.

– Okay, now the big news for Aussie dollar traders. The disqueit in markets, and the material uptick in fear has knocked the NAB’s fair value model for the Aussie from 80 cents last week to just 68 cents this morning. That’s perhaps another example of the extremis markets might be at just now but it also helps explain why the Aussie came under pressure last night and fell to 0.7058 at one point. Elsewhere in forex land, the yen has rocketed and pushed USDJPY down to 118.65 – that’s the usual thing we see when risk aversion rises in markets – yen strength. What’s unusual is that the euro also rallied. But all that tells you is that euro shorts, US dollar longs, were at extreme levels and traders are taking money off the table.

– Now commodity markets. Oil’s crash is simply phenomenal. Close to $38 this morning, the front Nymex contract has dropped a little less than 6%. My trading target has been low $30 – $32/$34 – for a while now but the speed of the last $4 drop has been incredible. Again, the question traders will be asking themselves is whether this is too far too fast? But who wants to catch the falling knife? The CRB made another low, levels not seen since 2002 with copper and base metals lower again. Gold’s half life as a safe haven from risk was extremely short. But perhaps that also tells you something about the current market settings.

– On the fed front, even though the speakers overnight held the line, bonds rallied. Here’s the take from Ray Attrill, the NAB’s co-head of global currency strategy. Attrill wrote it was a surprise US rates weren’t lower, however, adding that:

“…incoming Fed speak is holding to the view that the US central bank will still make a first move on rates this year (really?) Dennis Lockhart, considered a centrist and a current FOMC voter, has just said that the yuan, dollar and oil prices all complicate the US outlook (no mention of stocks of course), but that he expects the Fed to begin raising rates this year. Meanwhile, ex-Dallas Fed president Richard Fisher has just told CNBC markets today were quite orderly. He sounds more like an investment banker who just might be short of equities than a policy maker. Oh wait – he is.”

– On the data front today, we get a leading index of economic activity in China, New Zealand inflation expectations and then German GDP and IFO tonight. In the US, we get Richmond Fed activity new home sales, consumer confidence, Case Shiller home prices and the Markit PMIs.

And now from CMC Markets’ Ric Spooner is today’s Stock of the Day

Tassal Group

Continuing the theme of stocks to have on the watch list as potential buying opportunities when the stock market does settle down, salmon farmer Tassal Group is on my list. It’s a domestic oriented mid cap stock which will provide it with some immunity from large scale macro selling. It will also benefit from a weaker dollar which will improve its competitive position against domestic imports.

Fibonacci projections suggest possible support on either side of the 50% retracement and previous major high at $3.48. Below that the 61.8% retracement at $3.38 comes into play. Tassal is due to trade ex its 7c dividend on 9 September.

At $3.48, the stock will be trading around 12.5 times next year’s earnings.

Ric Spooner, chief market analyst, CMC Markets

You can follow Ric on Twitter @ricspooner_CMC

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