Key drivers of price action overnight

With US markets down heavily overnight, I’ve taken a look at the key drivers of price action.

Source: Bloomberg
  1. The Argentina bond default concerns. This is all sentiment-based however, as Argentina’s weight on things like the emerging market bond index is around 1.9%, which very low indeed. The default issue could still get rectified through the private sector, but it’s very complicated and a real ‘watch this space’.
  2. Alan Greenspan on Bloomberg said ‘the stock market has recovered so sharply for so long, you have to assume somewhere along the line we will get a SIGNIFICANT CORRECTION.’
  3. Ukraine Prime Minister said Russia was seeking to ‘revise the outcomes’ of world war Two.
  4. Adidas lowered its full-year profit  (now looking for $650m versus prior guidance of $830m to $930m) – citing Russia.
  5. Volkswagen reported an 8% decline in sales in Russia in the first-half, while Metro (the eurozone’s second largest retailer) also said events in Russia had impacted its sales in Ukraine. Siemens warned that tensions could impact Europe’s growth.
  6. Banco Espirito Santo in Portugal is down around 42% - one of Portugal’s biggest lenders, potentially tapping the market for cash and reporting a loss of $4.8b.
  7. Exxon Mobile had poor earnings. Trader-favourite Telsa is down around 2% post market.
  8. An article in the Financial Times that Marine Le Pen (right wing) is polling very well in opinion polls. This is not a major surprise given recent Euro elections, but a concern none the less.
  9. European ‘flash’ inflation print it at 0.4% - the lowest since 2009.

The key for me though was the jump in the US employee cost index (ECI), which at 0.7% was above the 0.5% expected and the biggest increase since Q3 2008. The headline index now stands 2% higher on a year-on-year basis. If you think that the Fed has been saying that the moves in headline inflation are simply ‘noise’ when you see wage measurements such as the ECI moving up 0.7% in Q2, it lends weight that the US economy can handle a rise in short-term rates in the next couple of quarters. The ‘lower for longer’ trade comes under pressure.

The higher ECI would explain why the US ten-year was flat on the session, despite a 2% move lower in the S&P 500 and 27% higher in the VIX.

Technically the S&P 500 closed through the 55-day moving average and also firmly through the April uptrend. Key support is now seen at 1923 (the 38.2% retracement of the recent rally). So there clearly has been a bout of technical selling in a market, backed by this barrage of negative newsflow. There would certainly have been sharp pick-up in short interest – 58% of all open positions held by IG’s global client base is held short.

Judging by the VIX there has been some serious put option buying.

We are calling the ASX 200 to open 5565 -65p or 1.2%, with energy stocks likely to be hit hard due to a sizeable sell-off in Brent and WTI.

AUD/USD has traded through recent lows, looking like the 200-day (at 0.9184) could be in play. All eyes are on payrolls tonight, though with economists expecting 230,000 jobs (range 310,000 to 160,000). Keep an eye on the U6 unemployment number and average hourly earnings as key drivers.

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