Overnight: And On The Third Day
|SPI Overnight (Mar)||5862.00||+ 98.00||1.70%|
|S&P ASX 200||5833.30||– 192.90||– 3.20%|
|Nasdaq Comp||7115.88||+ 148.36||2.13%|
|S&P500 VIX||29.98||– 7.34||– 19.67%|
|US 10-year yield||2.77||– 0.03||– 0.93%|
|USD Index||89.66||+ 0.17||0.19%|
|FTSE100||7141.40||– 193.58||– 2.64%|
|DAX30||12392.66||– 294.83||– 2.32%|
That the Australian market tanked yesterday in step with Wall Street is of no surprise from an investor psychology perspective. Yet Wall Street’s fall took the S&P500 back only to the beginning of January, while the fall in the ASX200 takes the local market all the way back to October. Psychology trumps logic.
Every sector closed in the red yesterday by significant amounts. It was always going to be a market-wide sell-off. Worst performers were info tech (-4.6%), given this sector had enjoyed significant valuation expansion from “new world” technology stocks, energy (-4.5%), given the oil price fell as well and recent M&A speculation had been inflating prices, and consumer discretionary (-4.2%), thanks to weak December retail sales data and, let's face it, stock market crashes lead to a drop-off in unnecessary spending.
Not that this was a crash.
The “best” performers were materials (-2.4%) on a 3% jump in the iron ore price, utilities (-2.7%) because they are defensive, and consumer staples (-3.1%), because even if we’re all broke, we still need to eat.
The worst individual performance came from IT stock and previous high-flyer WiseTech Global ((WTC)), down -11%, and thereafter a string of resource sector stocks. The winners’ board made for interesting reading yesterday. Gold miner Regis Resources ((RRL)) won the day in rising a whole 0.2%. In second place was peer Resolute Mining ((RSG)), unchanged.
With about fifteen minutes to go before the closing bell yesterday, the ASX200 hit 5800. This was the test. A failure to hold this support level, which for so long had proven strong resistance last year, would lead to a void opening up. As it was, the index bottomed at 5795 and closed at 5833.
We held. This morning the futures are up almost a hundred points.
This Year’s Model
In 1987, it was “program trading”. In 2007, it was “collateralised debt obligations”. In 2018, apparently, it was all about a leveraged short volatility instrument.
There is no doubt that Wall Street tipped over last Friday on an inflation scare. What had everyone astonished on Monday was the sheer speed with which the indices plummeted once the S&P500 passed through 2725, which happened to coincide with the Dow being down -1000.
In seconds the Dow was down -1600. In minutes it was only down -800. Computers going nuts? Yes.
The XIV is an exchange traded “note” (meaning a single instrument, as opposed to an exchange traded fund which is a basket of assets), which provides a leveraged short volatility play. It is an inverse VIX, hence its code – XIV.
It’s slightly more complex than this, but let’s just say if you are short volatility and the market starts falling, you have to sell to cover your losses. By selling, you cause the market to fall further, which means you have to sell more, which causes…you get the picture. Add in leverage, and the problem is multiplied.
Why on God’s green earth anyone would have shorted a VIX that spent all of 2017 around 10 quite belies comprehension, particularly when all around were crying “overvaluation!” And leverage it. But, apparently, billions went into this XIV. And it appears the XIV has given us fourteen reasons why volatility returned in force on Monday night.
Last night the Dow opened down -567 points from the bell. On Thursday, the VIX was trading at 10. On Friday, at 17. On Monday, it hit 30. Last night, it hit 50 on the open. The XIV went “limit down”, falling -94% before the exchange halted trading. With trading halted, stock selling halted, and the Dow immediately rallied 900 points.
There followed a wild ride of ups and downs, with the halt on the XIV momentarily being lifted before hitting limit down once more. But then around 2.30pm, the real rebound began.
Turnaround Tuesday. Gotta love it.
At the open last night, the Dow had fallen -10.7% from its high. Consensus has it that this three-day rout has served only to wipe off the overbought premium that had been built into the market and bring stock valuations back to reasonable levels once more. Consensus also has it that we will now go back to “normal”.
The multi-year run on Wall Street without a -10% correction made history. The 2017 run of the VIX at 10 or lower also made history. With a correction now in place, it is assumed Wall Street will now see more typical levels of volatility, more pullbacks following rallies. It won’t just keep going up and up and up again.
The sponsor of the XIV has announced it will liquidate the instrument on February 15. There are still XIV investors who need to sell. Given the computers took over the world on Monday, and many an investor could not even get into their trading platform let alone get a trade on, there are investors who will sell into any rebound.
There are leveraged investors who have been margin called, and need to sell. Managed funds which only permit redemption on certain days will be sellers on those days. This is not over yet, but I think we can say the worst is now behind us.
|Spot Metals,Minerals & Energy Futures|
|Gold (oz)||1320.70||– 17.90||– 1.34%|
|Silver (oz)||16.60||– 0.13||– 0.78%|
|Copper (lb)||3.20||– 0.04||– 1.19%|
|Aluminium (lb)||0.99||– 0.02||– 1.75%|
|Lead (lb)||1.19||– 0.01||– 1.09%|
|Nickel (lb)||6.07||– 0.16||– 2.60%|
|Zinc (lb)||1.59||– 0.04||– 2.52%|
|West Texas Crude (Mar)||63.58||– 0.22||– 0.34%|
|Brent Crude (Apr)||67.03||– 0.36||– 0.53%|
|Iron Ore (t)||76.00||+ 0.05||0.07%|
The US dollar index has continued its own rebound, up another 0.2% at 89.66.
With Turnaround Tuesday supposedly removing the crash risk, gold fell back again as it might. Or we might also note that in the GFC, investors dumped their gold to pay their margins.
The dollar weighed on base metal prices and once again on oil. Iron ore remained stoic to the last.
The Aussie has slipped further, in line with the dollar’s rally, by -0.2% to US$0.7887.
The SPI Overnight closed up 98 points or 1.7%. Strap in once more.
While the banks will no doubt enjoy a rebound after yesterday’s rout, the key to the CBA result will be how much the bank has put aside to cover potential fines and compliance costs.
The Australian share market over the past thirty days…
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