Trader’s thoughts – trade jitters and possible US government shut-down hastens selling

For investors, it’s cold comfort after yesterday’s sell-off; for the bears, a momentary pause in their bittersweet vindication.

The sell-off continues:

Wall Street’s carnage continues, but SPI Futures are indicating a positive start for the ASX 200 this morning. This is liable to change and very much mirrors the action we witnessed in futures markets yesterday. The final hour of US trade happens to be so volatile, that pricing on the SPI contract gives very little certainty about what the Australian session may hold. Nevertheless, at time of writing, some very slim upside potentially exists for the Aussie index this morning. For investors, it’s cold comfort after yesterday’s sell-off; for the bears, a momentary pause in their bittersweet vindication. The market has now given up over 13 per cent from its September-high and remains trapped in a down-trend. How and when this fall is arrested is the question; in the panic of the moment, perspective feels difficult to maintain.

Two high-level causes:

The very many risks whirling about markets are highly applicable to the Australian equities. Even though the ASX200 missed out on the parabolic rise experienced by US indices during the cheap-money, bull-market era, the concerns hindering sentiment directly relate to the fortunes of the ASX. It’s because of the composition of our market that this is so: it’s overly weighted financials and materials stocks. The crux of the global equity sell-off is twofold and applies equally to the Australian share market. On the one side, traders are collectively communicating (rightly or wrongly) that global growth is going to slow down considerably; on the other side, policy makers (that is: the US Federal Reserve) have signalled they will continue tightening global financial conditions.

The impact on the ASX:

Drawing those two facts together and applying them to the ASX 200, what you get is this: a mining and banking sector at the forefront of market participant’s anxiety. It must be stated that the materials sector has held up better than the financials sector; much like their global counterparts, the Australian financials space could be labelled as being in a bear market. But given the amber-lights flashing warning signs in growth indicators in global markets, fears are emerging that a non-negligible economic slow-down will befall the world economy. This of course, as it was digested yesterday, is happening at a time where the US Federal Reserve is driving forward with its interest rate and balance sheet normalization program. There is little confidence that the global economy is strong enough to support itself on its own.

The Fed v. the Markets:

The fundamental matter right now for markets is the emergence of a major split between what the US Fed is saying about its expectations for the US economy, and the expectations market participants have implied in pricing. There is the issue of credibility and trust here. It comes up every now and again, especially in a market-downturn, about how reliable central banks can be in assessing the economy, and subsequently enacting effective policy in response to economic changes. Fed Chair Jerome Powell kept alluding to the bank’s “modelling” to justify its policy stance. That is: the Fed’s numbers suggest good-times ahead for the US economy. While such a fact may prove true, the prevailing sentiment now is that the Fed is taking itself way off course.

No appetite for risk:

The dynamic has resulted in traders removing any long-calls on anything tied to future growth. It manifested clearly on the ASX during yesterday’s session: the materials sector was walloped, shedding over 3 per cent, while the few sectoral gainers were in defensive utility and real estate stocks. What may transpire today on the market, outside a struggle by the diminishing number of bulls versus the increasingly powerful bears, is a matter of crude speculation considering how irrational markets are apparently behaving. The big insurers’ stocks may add to the banks woes, after the damage caused by last night’s major Sydney thunderstorm led the Insurance Council of Australia to declare “an insurance catastrophe”. Once again, however, the expectation is that anything tied to growth or higher risk will likely suffer downside today.

No appetite for growth:

The desire to retreat from growth and risk is hammering the Australian Dollar presently. Commodity currencies were hit hard by the US Fed’s policy position yesterday, with the Kiwi Dollar and Loonie also feeling the pinch. Curiously, as of early this morning, the A-Dollar for one is edging higher, supported by a sell-off in the US Dollar. There’s not a strong justification yet for the greenback’s fall, especially considering the “less-dovish-than-expected” Fed. Perhaps the it owes itself to the higher risk of a US government shut down after US President Trump rejected last night a stopgap bill to fund US government operations. Whatever the impetus, the Euro has busted its range and rallied well into the 1.14-handle, and the Yen is threatening to break-through the 111-mark, after only a week ago trading above 113.50.

Some curious activity:

There’s just under an hour to go in Wall Street trade and the losses are still pilling-up, extending Asian and European markets’ poor day. The Nasdaq is flirting with technical correction and the Dow Jones is below 23,000, hitting a new YTD low. Fundamentally, confusion reigns throughout markets. The momentum of the sell-off doesn’t help, and the daily RSI is hinting at indices in oversold territories. Despite all this and the risk-off tone to trade, US Treasuries have fallen – maybe in response to the worries about a US government shut-down. Gold has proven itself as old-reliable, rallying through resistance to trade around $US1263; and crypto-currencies – of all things – has gone on a tear, with Bitcoin climbing as much as 10 per cent last night. It all amounts to some abstruse behaviour by traders, in what ought to be considered signs of disconcerting times.

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