The market reaction to the downgrading of the 2015 outlook by the IMF may have been the catalyst for the intraday selloff overnight, but it is by no means the only reason for global unease. The use of the term ‘frothy’ to describe markets didn’t help, as valuations are a subjective metric. Talk of overheating, overvalued and ex-growth perpetuates worry.
The US is trading at 18 times forward earnings – levels that bears love to point out as the same as October 2007. However, it is not stretched either. With US earnings season starting next week and very positive Q3 data already seen, it’s not hard to conclude that earnings should see upside.
The IMF downgrade was expected. Most analysts and market commentators had concluded that this would happen over the past week, so the market should not have been caught out. Again, this is why we believe last night was not down to just this one event.
It also looks to be sentiment driven. US futures have now fallen 4.4% since the top and, on a daily basis, the S&P has broken the uptrend to the downside (but that hasn’t been confirmed on a weekly chart yet). All these signals are building to a trigger point, and once again I see the Fed’s communication as the event that will pull the trigger, no matter how hard it tries to avoid it. The minutes tomorrow will be endlessly scrutinised for signs of rate rises and hawkish views.
In conclusion, I prefer to go long volatility. The VIX once again experienced a very sharp rise, adding 12% overnight to 17.3, to go with its 36% rise in September. The EU VIX has added 19.7% since September 19 and the Aussie VIX has added 43.5% since 3 September. That is only going to rise further today.
Ahead of the Australian open
I need to address yesterday’s intraday trade as it was the clearest sign the yield trade is investors’ crosshairs. The 2%-plus falls in the banks, the 1.5% slide in Telstra, CSL and the supermarkets saw the ASX off 1.6% just before lunch. The hunch that the RBA may turn slightly hawkish was the starkest indication that the ASX is now beholden to the rate cycles.
The 2.30pm RBA statement went as expected – the status quo in rates and the statement was maintained. The rally in the names mentioned above crystallised the view that the market will be sold off on any sign rates will rise. What is interesting from yesterday’s trade is that we think theories of RBA rate hikes are very hawkish.
If rates were to move (and we don’t believe they will within the next 9 months), a cut is a more likely scenario. This would actually signal yield trades to increase, and I would also say that the current slide in the banks has a yield floor. The question is, at what point? 7% or 7.5% net? That is going to be something to watch from momentum and an investment trend perspective over the coming weeks.
However, those questions will not be answered today as the intraday rout from yesterday experiences its second wave. We’re currently calling the ASX 200 down 77 points to 5207, which is below the intraday low from yesterday. Nothing looks like it’ll be saved today, with RIO and BHP’s resistance wiped out on the open yesterday. The banks will be tested again. It’s going to be a red, red day.