What a difference a day makes. Up until last night the bulls appeared to be in control, although the buying pressure had subsided from last week’s monumental run. Investors are still coming to terms with the downgrade of the U.S. credit rating from AAA to AA+, and rumours persist that other AAA rated European economies may be subject to downgrades.
A number of European countries, namely France, Spain, Italy and Belgium all introduced some short-selling bans to try to stem the recent selling pressure. The crisis is far from over in Europe and obviously the selling ban has not worked, with European banks down around 10% overnight. Note that last time there was a selling ban markets fell another 20%.
Investors continue to be concerned over the euro zone sovereign debt crisis and were disappointed by the comments coming out of the meeting of European leaders. Germany and France failed to alleviate investor concerns about the economic state of the region at the meeting. The euro zone economic council said that it would help strengthen national fiscal solvency, but Germany and France opposed the issuance of euro zone bonds, which had been hoped for prior to the meeting.
The market volatility is likely to continue as investors battle against the machines using algorithmic trading programs (algo trading). Algo trading has become dominant since the US removed the “up tick” rule back in 2008, and until the regulators reinstate the rule the markets will be subject to free fall, which has happened regularly over the past week.
The key US markets are now down over 15% from their April peaks and are perilously close to the flash crash of last week. Note that last time we had conditions like this the market collapsed 40% before finding a floor.
Commodities prices have been volatile this week, and are generally finishing lower, with the exception of gold which is at record levels above $US1,824 per ounce. Crude oil is pulling back to the $US80 level and copper prices are below the $US4.00 per pound level again. The yield on the benchmark 10-year Treasury note briefly dipped below 2% for the first time in nearly 60 years.
US Markets
US stock markets were crushed overnight as investors fear a recession, and following on from the steep losses in European and Asian markets. Sentiment was also dampened as US investment banks lowered their global growth estimates; investors are reassessing their expectations for stock prices going forward.
The Dow Jones Index fell below 11,000, while the S&P 500 and tech-heavy Nasdaq slumped 4.5%. After eking out modest gains earlier this week the US markets have been slammed and look set to test the lows of last week near term. Overnight no sector was spared but investors dumped energy and materials stocks, as commodities prices plunged and the financials joined their Euro counterparts in the rout.
Sentiment has been hurt by poor economic news regarding manufacturing figures and some downgrades to global growth into 2012 from investment banks. This has undermined the tech stock projections and once again the financials have been lagging the market. That changed overnight though when the financials led the falls.
Overnight the Dow Jones closed sharply down -3.7% at 10,990, the S&P 500 index closed down -4.5% at 1,140, the Nasdaq ended down -4.5% at 2,380, and the smaller cap Russell 2000 was down -5.9%. Look for US markets to test recent lows in the coming days.
European Markets
European stock markets held on to recent gains earlier this week, but last night investors rushed for the exits, dumping banking, mining and energy shares due to fears over the euro zone debt crisis and fears of a possible double dip recession as global growth falters. The rout on European markets extended after the disappointing US economic data and global growth downgrades from some investment banks. Bank stocks were decimated after a Wall Street Journal article reported that US regulators are stepping up their surveillance of European banks due to worries that they could face funding difficulties.
Overnight the Stoxx Europe 600 index slumped -4.8% and European losses were spread across all countries and all market sectors, though banks felt the brunt of the falls, with most down over 10% in the session. In London the FTSE 100 index was down -4.5% at 5,092, the German DAX was down -5.8% at 5,602, while in France the CAC was down -5.5% at 3,076.
European stock markets are expected to remain weak until they get some action that addresses the region’s debt crisis situation and investors come to terms with the slowing economic growth, as evidenced in the German GDP figures which came in below expectations.
Asian Markets
Asian stock markets have continued to be weak and many markets are either at their March lows or look set to test these levels near term, as the worries about the global economic outlook continue to weigh on sentiment.
In Japan the Nikkei Stock Index has again fallen below 9,000 and is at its lowest finish since mid-March, as exporters were again hit from concerns over the yen’s strength and fears of declining global demand. In Hong Kong the Hang Seng Index closed around the 20,000 level again, while in China the Shanghai Composite also declined. Asian investor sentiment has been plagued by concerns that debt problems in the key US and European markets will hurt demand for manufactured goods and commodities.
Overnight in China the SSE Composite was down -1.6% at 2,559, while in Hong Kong the Hang Seng Index was down -1.3% at 20,016 and in Japan the Nikkei 225 Index was down -1.3% at 8,943. The South Korean KOSPI was down -1.7% for the session, while the Indian market was down -2.2%.
Our View for the Australian Market
The Australian share markets continue to be driven by overseas sentiment, so expect the volatility to continue near-term, particularly in Europe and the US.
The S&P/ASX 200 index looks set to test its key support level around 3900 near term, and if that fails the next support level would be 3750, which was a pivotal level back in the 2008 GFC recovery phase and held last week.
Expect stock prices to continue to experience volatility near term. Last week we had blue chip stocks down over 30 percent from their April peaks and that was when bargain hunters stepped in. Gold stocks have weathered the storm, supported by the surge in the gold price which is again at record levels above $US1,824 in a “flight to safety”.
There are still concerns that the sovereign debt situation in Europe is out of control and the likes of France may see credit ratings downgrades near term. The euro zone leaders failed to address the concerns over the sovereign debt crisis this week.
The S&P/ASX 200 has traded in a 16 percent range in the past few weeks. The line in the sand was drawn last week around 3750 and the 4000 level remains a pivot key in the short term.
Investors need to be attuned to this resumption in selling pressure, from the negative leads in the U.S. and Europe, as investors plot a path from here, in an environment where there are concerns over faltering global growth and European debt contagion fears, which is sparking the spectre of a double-dip recession.
Our reporting season continued this week with mixed results. The RBA looks set to leave rates on hold near-term, the dividend season is underway, and the Aussie dollar has strengthened this week which is providing additional headwinds for corporations with US earnings.
Banks are attractive on a yield basis, but they are retesting key support levels which would need to hold. Many blue chip stocks are even cheaper on a valuation basis but investors are still fearful, plus fund managers and investors alike are still underweight equities.
The markets need to stabilise near-term and sentiment from overseas needs to improve before we fully commit to the view of a turnaround. On an earnings basis there is reason to start accumulating when all others are most fearful. The S&P/ASX 200 is currently trading at 4140 having pulled back from key resistance around 4325. Key levels for the index next week will be 4325 and 3900.
Keep that shopping list close at hand and be prepared to start accumulating when others are most cautious, you can use options to limit your risks. 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. MDS Financial Advisory Services offers general advice on trading options to generate consistent steady income on your investment portfolio. Call me on 1300 610 024 for further information.
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By Michael Hevern
Head of Research
