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S&P 500 tumbled over 2% towards 2000, the largest one-day fall in 18 months. More critically, the index plunged below its 200-day moving average, the key support level which has survived several tests this year.
The Dow and the S&P 500 are now lower on the year. The declining US stocks reflected the broader downtrend in global equity markets. While there are several indices still higher on a year-to-date basis, most are in the red for this quarter, even Japanese equities, despite a strong earnings season.
European markets do not look compelling either. The DAX has been grinding lower, falling over 15% from the peak on 10 April, and we have seen a strong down move in recent sessions. The index gave up 500 points in the last-two sessions to close below 10,500. While the Nikkei is holding up relatively well, it pierced below its 50-day and 100-day moving averages in the previous two sessions.
This suggests that the index may lose the 20,000 handle today. Investors need to respect the downtrend and position accordingly. It would take great courage, or foolishness, for contrarians to bet against the market at this moment.
Chinese markets are still struggling with selling pressure, and the guessing game that the authorities are playing with the market participants has yet to be proven as a good tactic. Therefore, it’s anybody’s guess whether the China Securities Finance Corp, the de-facto state margin trader, would throw its weight behind the Chinese equity market today.
Should sellers find no state buying, particularly near the end of the trading session, they may be inclined to push lower. Many analysts believe the line drawn in the sand for the Shanghai Composite is at 3500. Currently, the 200-day moving average is still repelling bears. It will be interesting to see if this key support level can be broken today.
Meanwhile, investors rotated their funds into classic haven assets like government debt, Japanese yen and gold, as cautiousness prevailed. The US treasury curve flattened as longer-dated yields fell by a bigger margin. 10-year and 30-year yields dropped 5.6 and 7.2 basis points. USD/JPY retreated below 123.50, and remained thereabouts in early Asia.
Do you feel lucky, gold?
Gold rose to the highest in a month, climbing above $1150. The precious metal has recovered an excess of 7% from the five-year low in late July. The weakness in the global stock markets, and fears about competitive devaluation has made gold more alluring. However, I am not totally convinced that it is the turning point that investors have been looking for.
The broader environment remains unfavourable to gold - higher interest rates, lower physical demand, deflationary risks, and sluggish global growth. I feel there needs to be more work on the upside before I feel confident that gold has seen a longer-term bottom in July.
Risk selling to extend in Asia
The leads from overnight markets in the US and Europe suggest that we should see weak sentiments spreading to the Asian stock markets today. The Nikkei 225 slipped below the key 20,000 level early on, while Australia ASX dropped around 1% in opening trade.
In Singapore, the Straits Times Index (STI) is teetering on the precipice of 3000 and we could see traders testing below this psychological level today. Fresh geopolitical tensions in the Korean peninsula may further drain risk appetite.
On the data front, the market will be watching China’s Caixin manufacturing PMI, where the consensus is for an improvement to 48.2. Needless to say, an estimate miss will dampen sentiments further.