We are now approaching the season for markets to correct – the end of the northern summer and early autumn when share markets tend to take a breather and produce a sell-off.
Sometimes they start early, other times, markets rise in August (late summer), only to start weakening in September once people return to work after the summer holidays and look to take profits.
But this year the selling started early in late July, judging by the tide of red ink on Thursday and Friday across the globe, and there are prospects for another bout of selling today.
Despite all the fretting about the ending of the Fed’s quantitative easing in October, markets had been quiet for the past few months, until last Thursday when for a variety of reasons, investors started taking flight.
That continued on Friday in Australia, Asia and on into Europe and the US, although at a much slower pace than the day before.
So stand by for a couple of months of increased volatility – and perhaps more until fallout settles from the ending of the Fed’s $US10 billion a month of extra spending stops and interest rates.
As a result of Friday night’s weak trading offshore, our market will start today with a fall of 20 points or more after a weak close on the futures market.
Markets elsewhere in Asia will also start weaker, despite some strength last week.
Over last week US shares fell 2.7% (with the S&P suffering its biggest weekly fall for two years), Eurozone shares fell 3.5% (the German market suffered its biggest weekly loss for two years as well) and Australian shares were down 0.5%.
But not all markets – Japanese shares were up 0.4%; Chinese shares were up 2.8% (but down 0.7% on Friday), with the monthly surveys of manufacturing on Friday confirming that the economy has turned up (and the usual monthly data for July next Friday will further confirm the improvement).
The AMP’s Dr Shane Oliver says that while Australian shares got hit on Friday (in reaction to the Wall Street sell-off the night before), it came after a very strong month with the ASX 200 up 4.4% in July.
The “risk off” move by investors weighed on commodities with oil down 4.1% in particular (and looking to fall to $US96 a barrel early this week, or lower).
Bond yields were mixed, finishing around 2.49% for the key US 10 year security early Saturday from 2.56% early Friday, our time.
Gold was higher on Friday, up $US12 an ounce to just under $US1300, but lower over the week (and July).
Iron ore rose in July (for the second month in a row) but eased 0.4% on Friday to just under $US96 a tonne.
The Aussie dollar fell last week until Friday night in offshore trading, when it bounced back and closed at 93.12 USc on early Saturday, our time.
It was down on the week but up from the lows of well under 93c the night before.
Dr Oliver said in a note over the weekend the fall back in share markets "looks to be just a healthy correction”.
"Having not had a decent pullback since January/February US shares (and hence global shares) had become vulnerable to a pullback.
"We are also in the weakest quarter of the year for shares seasonally, ie its correction season. However, while it could have a bit further to go it’s likely to prove to be nothing more than a correction – say 5% top to bottom," he said.
