Autumn sorrow selloff at an end?

Asian markets limped to the end of September after a horrific August and September performance led to the worst quarterly declines in years.

selloff
Source: Bloomberg

After the dramatic selloff seen in the region yesterday, markets were primed for a bit of a bounce today. Even poor data out of Australia and Japan couldn’t quite take the steam out of them, although most markets were far away from recovering yesterday’s losses.

In the wake of the worldwide selloff in equities that began in August, global markets have been in a heightened state of sensitivity. Rarely does one see so many major event-driven selloffs in quick succession. Last week the VW emissions scandal prompted a major selloff in European markets, carmakers and related companies worldwide.

Then Hilary Clinton, who had been planning to announce some new healthcare policies, jumped on the egregious price increase in a toxoplasmosis drug by new internet hate-target Martin Shkreli to decry the price of drugs in the US. This prompted a major selloff in healthcare and biotechnology stocks.

Following this, Monday saw the release of an Investec report on the major diversified mining companies, reiterating a “hold” recommendation on Glencore. However, it noted all shareholder equity in the company could be eliminated in a worst-case “spot price scenario”. This lead to Glencore’s FTSE-listing falling 29%, sparking a major global selloff focussed on the commodities sector.

The section devoted exclusively to Glencore in the report amounted to a total of just 264 words. Nonetheless, global markets went into a tailspin, with equity markets taking a bruising and spurring aggressive selling in commodity currencies.

Glencore came out with an aggressive statement saying their business “remains operationally and financially robust — we have positive cash flow, good liquidity and absolutely no solvency issues.” This saw the stock rally 17% when the FTSE opened on Tuesday.

Almost as soon as the FTSE 100 opened, a major reversal of the downtrend seen in commodities currencies was seen. The Aussie dollar rallied 1.2% as soon as Glencore started trading on the FTSE and the Kiwi dollar rallied 1.5%. Given the overnight performance in Aussie, the ASX looked primed for a decent performance pre-open as the two have shown a correlation of 76.5% over the past month.

 

Asia

The Nikkei 225 lost 8.7% in September and 14.6% in Q3, its worst quarter since Q2 2010 where it lost 13%.

The Hang Seng Index lost 4.4% in September and 20.7% in Q3, its worst quarter since Q3 2011 where it lost 21.5%.

The Shanghai Composite (SHCOMP) dropped 4.4% and 28.5%, its worst quarter since Q1 2008 where it lost 34%.

Japanese industrial production declined for the second month in a row month-on-month, a 0.5% decline in August. This means that it is increasingly likely Japan’s GDP may have contracted again in Q3 in quarter-on-quarter terms, meaning the economy is in a technical recession. This is a dire state of affairs for Abenomics over two-and-a-half years down the line.

With Prime Minister Shinzo Abe’s approval ratings in the doldrums following the passage of controversial security legislation, his recently announced new “Three Arrows” ringing hollow, and Japan about to enter a technical recession, the Japanese government is understandably campaigning hard for the Bank of Japan (BOJ) to step up easing at its October meeting.

 

ASX

The ASX 200 lost 4.3% in September, far worse than the average change in September of -2.7%. The Aussie index lost 8.8% (479.7 points) in Q3, the worst quarterly performance since Q3 2011 where it lost 13%.

Australian building approvals dropped a big 6.9% in month-on-month terms, far worse than the consensus expectations for a 2% decline, and their largest monthly decline in a year. Taking alongside the notable drop off in auction clearance rates in September, there are increasing signs that the key engine of the Australian economy, property, is beginning to slow.

The speculation the Reserve Bank of Australia (RBA) will have to cut rates again in the coming months is also rising noticeably. The data prompted a sharp retracement in the Aussie dollar and the ASX following its release at 11.30 am. However, both markets managed to shrug it off and continue to gain.

Telecommunications was the best performing sector on the ASX, rising 1.9% on the back of the Vodafone and TPG Telecom deal. Vodafone Hutchinson Australia (VHA) announced a $1 billion 15-year deal to use TPG’s “dark fibre” network. This will help fund TPG’s fibre-optic cable competitor to the National Broadband Network (NBN). Investors clearly backed TPG CEO David Teoh’s aggressive tactics as the stock rose 6.1%.

The banks also had a strong day with their market capitalisation weights being a main driver for the index as whole; the sector rose 2.1%. CBA in particular had a stellar day as it gained 2.7%, with this partly being driven by short covering as the stock has been heavily targeted by short-sellers in recent months.

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