There is no getting away from the fact that this is going to be such a key session. Despite the outrageous moves in the European and US futures markets overnight, it is Asia that is at the epi-centre of this concern. Specifically, if traders are going to buy Japanese, Australian and Hong Kong equities today and add risk assets in general to their portfolio, then we are going to need to see stability in the open of the Chinese futures market at 11:15am AEST and the cash market 15 minutes later.
The period around the Chinese open has been the key catalyst over the last few days, so another open 3% lower means regional markets will attract a new wave of sellers. Not that attracting sellers is hard to come by, and today’s open is shaping up for another horror show. The moves are so aggressive and so extreme, that the idea of buying fear is only for the bravest of souls.
Our opening call is currently 4820, which implies a 3.6% fall. Is this the capitulation move that the bulls so desperately want? This is the question many will be asking, and the open will therefore be absolutely key – although there will be some hesitancy prior to the China market open. There is no doubt, however, that many will be trying to pick the low here. If we do get an open at 4820, the ASX 200 will technically be grossly oversold. This is not just an Aussie issue, equity markets around the world are so oversold. The risk is that we get a short covering bounce, and of course the issue is timing.
The market internals are screaming ‘buy’ as well, and there are a mere 15% of ASX 200 companies trading above their 50-day moving average. This is likely to fall to around 10-12% when the equity market opens. It’s worth keeping in mind that since 2007, there have been only five other periods where the percentage has been this low, and they all resulted in a strong bounce in the market. Technically, the 14-day relative strength index (RSI) is the lowest level, and therefore showing the fastest rate of change since 26 September. Although, we had to wait until 13 October before we subsequently saw a 450 point rally.
An open at 4820 would also see the index trade through the uptrend drawn from the 2009 low at 4837, and we are going to need to see stability in Chinese market as well as a strong earnings result from BHP to warrant a move higher from here. A close below the uptrend means the market will be staring at the June 2013 lows of 4632.
The question: What can turn sentiment around here?
The ferocity behind the selling is there for everyone to see and there is an all-out liquidation of equity holdings, with the JPY and fixed income the places to be right now. Clearly, the Federal Reserve are not going to hike rates in September and the market is now placing a 20% probability on this fate. Still, we are going to need to see something more inspiring than the Fed holding-off on hiking rates. The mere fact they are having to hold off is bearish in itself, but we need to see something co-ordinated and specifically coming from Asia given this is where the concern is stemming from.
China failed to cut Reserve Ratio Requirements (RRR) over the weekend and this has hurt sentiment. We need to hear of easing measures fairly soon and we need to hear of commercial banks increasing liquidity to infrastructure projects. In general, the focus has to shift to something sizeable on the fiscal side. We probably need to see a massive pick-up in buying from the Stabilisation Fund. If the fund has been buying in the last couple of days, it has had little effect.
China needs to convince the domestic market and the world that its economy is able to cope with further outflows and that its slowdown is under control.
We will need to see other Asian countries working together, providing a harmonious approach to future FX moves. Some are calling for monetary easing – there is merit here, but this won’t do anything for the currency weakness and subsequent outflows.
We will need to see the European Central Bank step-up its fighting talk as well. With EUR/USD breaking above the levels when Benoit Coeure talked about ‘front loading’ bond buying purchases in May, this prospect is elevated. The Bank of Japan will also need to throw the idea that it could do more if needed too.
The fact that the VIX (volatility index) has spiked to 40% shows huge put option hedging of portfolios, and of course, huge implied volatility. Add this to massive volumes going through cash and futures markets, and it shows the market has no idea where to turn. A pick-up in sentiment can’t come from earnings, it can’t come from economic data (although a strong US GDP point this week will help), but it has to come from a co-ordinated approach from central banks and this points to leadership from China and other Asian (excluding Japan) countries. Until that time, the capital markets will compare the macro backdrop to the emerging market concerns in 1997/98. Market players crave clarity and without it, volatility in markets will stay extreme.