Globally markets started the week on a sour note, but gradually gathered steam in another-end-of-month rally. Today also marks the end of the quarter and traders will be rejoicing (not for any good reasons however, as it has been one of the toughest quarters since the GCF). Volatility has been exceptional over the past few months and there does not appear to be any respite in sight.
It has been all about “risk off” of late, and commodity prices have been the big story this month, with gold prices confirming the double top and now trading all the way down to its 200-day moving average around $US1,600, having started the month at all-time record highs of $US1,920. The sell-down in commodities has been across the board, as traders who are all highly leveraged are being forced to liquidate due to the excessive volatility and the increased margins in these markets of late. The falls have been led by copper prices which are seen as the true indicator of the underlying world economic condition. Copper plunged -5.6% in a single session this week, and this comes after a -12% fall last week and a slump of over -22% for September. Crude oil has also sold off heavily and is down over -27% since its April peak and is hovering around $US80 per barrel.
Globally markets have all followed the same script, with traders on edge as the debt contagion situation in Europe remains unresolved. The big contention currently is over the proposed expansion of the European Financial Stability Facility (EFSF).
The selling pressure on the markets has come as eurozone leaders remain indecisive over the changes to the EFSF eurozone bailout fund, after leaders raised concerns that they would demand collateral as a precondition for participation. The changes need to be ratified by all 17 eurozone members to take effect, but the German parliament has now voted for the change, which is positive. The split between the European ministers over whether the size of the EFSF will be increased from EUR440 billion from EUR250 billion has kept traders on edge.
Globally financials remain under pressure due to concerns over capital adequacy and now the European Commission is even considering a financial transactions tax, which could raise up to $80 billion. There are still short selling bans in a number of European countries.
US markets have closed down 7 of the past 10 weeks and there looks to be some window dressing for the end-of-quarter. In Europe the market falls have been almost double those in Australia and the US, and many of these European markets look broken, similar to the days of the GFC. Regulators must act on implementation of the EFSF sooner rather than later, otherwise the global financial system could cease up one again, as it did during the GFC.
Asian markets have also been reacting to what is happening in Europe, with the Japanese market reaching its lowest level since April 2009, and the Chinese Shanghai Composite trading at 2-year lows as well.
Fears over contracting Chinese growth are spooking global markets and we are seeing mining stocks being dumped as they are heavily dependent on the Chinese imports for their earnings. Traders appear to be closing their exposure to mining stocks ahead of the Chinese manufacturing PMI data which is due out on Friday night.
Our View for the Australian Market
The Australian market also started the week under selling pressure. However Australian investors and fund managers have held their nerve as the week progressed, despite the caution and volatility being exhibited by overseas investors.
The materials stocks in the Aussie market have been under considerable selling pressure this week, but the financials have started to offer some support. Remember it’s the end-of-quarter today and there is shortened trading week in some states next week.
We are definitely in a trader’s market, and the bears remain in control. The Aussie market has managed to trade above the key psychological level of 4000, but the 4080 mark looks to be a key stumbling block. The market has suffered from the severe falls in commodities prices, as a number of commodities have continued to crash through their key levels.
However we did get the end-of-quarter recovery we were looking for, even though it was a little delayed. The S&P/ASX 200 index is attempting to find support short term, but there is resistance around 4080 and then 4200, so if we break down through the 3850 level, then the next lower key support level is in the 3760 area, which the market reached in our August “flash crash”.
Stock prices will to continue to be under pressure and experience volatility near term, as long as the index holds below the 4250 level. The US dollar is the key, as it has been appreciating against all the majors in the past month and this has proven a headwind for equities and commodities alike.
Local traders also need a resolution to the EFSF. The successful German parliament vote overnight means that 10 of the 17 EU nations have now voted on the package. There is a note of caution however, as the eurozone crisis is far from resolved. Greece still faces the real prospect of a default or a restructuring, and many observers have questioned whether the EFSF has enough resources to prevent contagion if the Greek problems spread to the bond markets of Spain and Italy. The EFSF is starting to clear hurdles, but many policymakers remain firmly against expanding the facility beyond the current EUR440 billion, as German and French leaders fear that this would undermine their triple-A credit rating.
The Australian government is handing down a report today which is expected to cast a shadow over when the budget will return to surplus. Interestingly the government is citing the poor performance of the share market for its shortfall in tax receipts, as revenue from capital gains tax has diminished over the past year. Also the MMRT mining tax will be in the spotlight again next week, as some parties are talking about extending the tax to the gold miners.
Investors should be looking to utilise options strategies to protect themselves in this type of market, as there continue to be issues over eurozone bank solvency and the agreement over EFSF bailout fund, so be nimble when trading and manage your risk.
Remain attuned to the news from overseas particularly from China, Germany and the US regarding their economic growth and debt issues. China will report its PMI manufacturing data tonight, while the US releases its ISM manufacturing data on Monday and the monthly Non-Farms Payroll employment data on Friday.
The S&P/ASX 200 is currently trading at 4010 having again found tentative support at the 3855 level this week. Key levels for the index next week will be 4180 and 3850. Be prepared to use options to protect your capital and reduce your risk.
Expect to see further volatility going forward as the market participants look for some guidance for the direction of the market.
Use options strategies to reduce your risk in these volatile times. The MDS Financial Advisory Services team can help with this and we have also discussed some of the strategies in our Analyst’s Eye Articles recently.
By Michael Hevern
Head of Research
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