A worrying rise in market instability on Friday centred oil prices, oil and gas companies and the hundreds of billions of dollars in bonds they have issued, triggered a global sell-off across all markets, except gold and sliver.
Shares, fixed interest securities, oil and gas futures all sold off worried investors scurried for safety and raised fears the looming rate increase this Thursday morning, our time, from the US Federal Reserve could trigger a further destabilising sell-off.
As a result of the rise in nervousness, our market will be down by around 70 points, or 1.5%, at the start this morning according to the ASX futures market after European and US markets fell sharply on Friday night.
Local investors will not be impressed by another sharp slide in oil prices, or the sudden rise in volatility and concerns about high yield bonds, nor will they like the way iron ore prices ended the week at a new low of $US38.30 a dry tonne on Friday, and down 4.3% for the week, according to Metal Bulletin data.
A big shock for markets though was the news that two investment funds either closed (one on Thursday), a $US789 million retail investor-exposed high yield fund operated by Third Avenue, or suspended redemptions (on Friday), a $US400 million credit fund aimed at professional investors run by a manager called Stone Lion Capital.
The collapse of the Third Avenue fund is the biggest US mutual fund failure since 2008, when Reserve Primary Fund famously “broke the buck” – that is, lowered its share price to less than $US1, which helped trigger the GFC after Lehman Brothers collapsed.
The problems at the two funds triggered talk about whether this was a sign of emerging credit and liquidity problems, or a one-off due to poor investment decisions by the managers. Both funds indicated they could not raise the money to pay investors because it would mean more losses on top of losses already incurred.
While rising market instability was expected this week in the run up to the Fed decision (around 6 am our time on Thursday), Friday’s sell-off and other problems, caught many investors by surprise with its intensity and global nature.
Not helping confidence was the shock news that the head of Fosun International (China’s largest private conglomerate) had been detained as part of the continuing anti-corruption drive. The news saw shares on Fosun suspended on Friday in Hong Kong.
Fosun’s chairman Guo Guangchang has been described as ‘China’s Warren Buffett’ for the way he assembled a wide range of companies inside China and offshore (especially in finance and insurance, like Buffett).
Guo was said to be “assisting in certain investigations carried out by the mainland judicial authorities”, according to a statement from Fosun which did not say whether he was the target of the inquiry or was helping police gather evidence on someone else.
That added to the concerns and western analysts say the news will spark a sell-off in China today and a boost in the outflow of money (which topped $US50 billion last month, according to some estimates).
The Shanghai market was down 0.6% on Friday, but will go lower today on the news of the move against Mr Guo.
That news from China, the fears about junk bonds, oil and gas prices and the looming Fed meeting saw Wall Street sell off sharply on Friday, with losses of 1.7% or more than 300 points for the Dow to 2.2% for Nasdaq – and close to double that for the week. Oil prices in the US and globally fell by 10% or more in the worst weekly drubbings of the year so far.
Not helping was from the International Energy Agency which forecast another year of oversupply and weak prices in 2016 – an outlook that rattled oil, gas and other commodity markets and helped raise fear levels in the junk bond sector.
If our market opens more than 70 points lower, it will plunge through the key 5,000 point level, considered to be a key support level by investors.
Our dollar fell to around US $71.90 early Saturday morning, dropping a cent in trading on Friday as the US dollar also rose.
Gold prices edged up (they certainly didn’t soar so investor fears were not visceral), but what did worry many analysts and no doubt regulators was the problems at the two big funds.
Gold and rose $US3.70 an ounce on Comex in New York to around $US1,075 – but still ended the week with a loss of 0.8%. Comex March silver fell 22.6 cents, or 1.6%, to $US13.884 an ounce – down around 4.4% for the week. March copper added 4.4 cents, or 2.1%, to $US2.117 a pound, for a weekly rise of 1.8%.
The concern is that having seen the two stop doing business, other funds with big losses and rising redemptions, might be tempted to follow suit and add to the Fed’s problems.
