With such a long menu of possible catalysts, it was probably a good thing that the ASX was closed yesterday given the size of the falls across Asia in the wake of Friday’s slide on Wall Street.
Otherwise it would have made for a day of heavy losses if there had not been a holiday.
And while the holiday Monday merely postponed the pain until today for Australia, there were signs the wave of selling seen Thursday and Friday in some offshore markets, slowed overnight.
The Dow and the S&P 500 climbed after a day of volatile moves, reducing earlier losses and the size of the expected fall for the Aussie market today.
Losses were smaller than Friday – a half to just over 1% in European trading. Gold and oil rose, then dipped. Gold ended down around $US12 an ounce at $US1,253 an ounce.
All this is likely to see a smaller fall at the start of trading today than indicated last Saturday – around 20 points instead of 55 points on the futures contract.
Interestingly the Aussie dollar shook off the negative sentiment of last week and climbed back past 87.50 US cents this morning – up a cent from the three and a half year lows of 86.60.
So why the latest sell-off? Well, there’s any number of quite acceptable explanations.
According to analysts and market reports, the reason for the falls this month (there have been three days where there have been sharp falls on sharemarkets – a fortnight ago yesterday and two last week, including the Friday night sell off).
There was the slower than expected growth suggested for China from last week’s ‘flash’ report on manufacturing activity this month – which will be updated on thursday, along with the official government survey. Not the major reason.
Then there was a more likely reason – the plunge in the value of the Argentinian peso after the government abandoned its support of the currency.
The worsening political tensions in Thailand have not made the situation better, and could have knock-on effects across South East Asia, especially on Malaysia and the weakening Indonesian economy.
On top of that there’s the continuing political uncertainty in Ukraine, which threatens to drag Russia and the EU into a political confrontation.
These are all emerging markets and the conjunction of events has renewed doubts about the health of these economies, plus the likes of Brazil, Turkey (where’s there’s continuing political problem), Russia, South Africa and of course, China.
And then there’s another less mentioned possibility and that is the overstretched valuation of the US sharemarket after the long rally since March 2009.
While the US economy is doing better than expected, corporate earnings growth has been slowing, even in parts of the tech sector and more and more analysts say they wouldn’t be surprised if there was a correction in the offing (that’s a market fall of 10% from the most recent peak).
Of course there’s also the big imponderable – this week’s meeting of the US Federal Reserve which is expected to reveal another $US10 billion cut to its easing spending on Thursday morning, our time.
While Asian markets yesterday played catch up to Wall Street’s bad Friday, by the time trading hit Europe and then the US, much of the negative momentum had vanished.
The Tokyo market fell 2.5% and big falls were racked up in Hong Kong, Indonesia and in Europe where the falls were well above 2%.
The Nikkei in Tokyo has now lost 10.4% and moved into correction territory (but it did jump 57% last year). Hong Kong’s Hang Seng is down nearly 8% so far this month.
The Shanghai market lost 1% and the South Korean market was off 1.7% as investors continued to sell shares with connections to emerging markets (It’s not too long ago that South Korea was thought of as an emerging market).
Last week’s losses for Wall Street were the worst since November 2011 for the Dow (which fell over 3.5%). The S&P 500 shed 2.6%, the biggest weekly fall since May 2012, while Nasdaq’s 1.7% drop was the worst since last August.
With quote a few tech majors reporting this week, led by Google and Facebook, the Nasdaq could do better than the wider market and the Dow stocks. Turkey’s Lira also fell more than 4% last week.
It’s a roll call of emerging market currencies, which along with their weakening economies, look like providing the first big test of confidence for 2014.
