Sour market sentiments

Market sentiments continued to sour during the overnight session, with a host of factors being thrown as reasons behind the risk selling. The VIX index rose to 27.63, the highest in three weeks.

Source: Bloomberg

European shares dropped more than 2% as Glencore plummeted 29% in London, and Volkswagen continued to fall following its emission scandal. In the former, market participants felt the mining giant’s efforts at reducing debt were insufficient, given the weak energy and metal prices scrimping on its revenue outlook, prompting them to sell off the stock.

My colleague, Evan Lucas, wrote about Glencore in more details here. The fallout from Volkswagen is spreading to its other car brands. Its Audi division said 2.1 million cars were impacted in the emission scandal while the share of its marque brand Porsche was down 6.9%.

Some banking counters were also affected by news that the Swiss competition commission, WEKO, is looking into possible manipulation in the precious metals market by some major banks. HSBC and Barclays were lower.

Over in the US, biotech and pharmaceutical shares were down, as investors fear the government may step up regulation over setting of drug prices after Turing pharmaceutical’s 5000% hike of a specialty drug created a media furore.

The S&P 500 closed below key 1900 for the first time since 25 August, dropping some 2.6%. The Dow dipped below 16,000 but managed to close a whisker above the level. Nonetheless, the index still fell 1.9%.

Meanwhile, the message from the Fed seems to be consistent, with New York Fed president Dudley sticking to the ‘we would like to raise rates this year’ narrative. Mr Dudley said if economic conditions continue at the current pace of growth, the Fed will be more inclined to tighten interest rates. He added that the FOMC is paying close attention to financial conditions.

The PCE inflation readings for August were all as expected, which suggested limited market implications. Headline figure was flat m/m and ticked up only +0.3% y/y while core inflation accelerated slightly to +1.3% y/y from +1.2% y/y previously, rising +0.1% m/m.

In the FX space, commodity currencies bore the brunt of the risk selling. AUD slipped below 0.70, and remained under the level in early Asia. NZD slipped towards 0.63. The Japanese yen was bid up on safe-haven demand, with the USD/JPY dropping below 120 again.

Overnight selloff to spread to Asia

The weak leads from overnight market is certain to carry over to the Asia trade. Australia and Japan already slipped in early trade. The STI may suffered further declines, after closing below key 2800 yesterday at 2791.92.

Premier Li Keqiang stressed that the government will not waver from its reforms and long-term economic goals due to short-term volatility in the economy.

Onshore markets in Hong Kong will return to the fore after shutting for mid-autumn celebrations, while Taiwan will remain close after Typhoon Dujuan hit the island on Monday. South Korea is still away, and will resume trade on Wednesday.

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