Welcome to the new normal for markets here and offshore for the next short while – rising volatility as the Fed moves to end its third round of quantitative easing. Investment banks, hedge funds and other speculators will love the rise in unpredictability in markets, small investors will be powerless.
It means trading profits, as the forthcoming 3rd quarter results from a string of US banks, starting next week, will confirm – their FICC profits will jump sharply (that’s Fixed Income, Currencies and Commodities’ trading revenues and profits).
The rising instability is being driven by changing sentiment in the US, with big rises and falls in markets now the order of the day for a while longer.
That changing sentiment saw volatility rise to the highest level on Wall Street overnight since February.
As a result, for the third day this week Wall Street overnight Thursday saw a triple digit day – with the Dow this time losing more than 300 points or close to 2%; the S&P 500 sold off as well, losing 2%, and the Nasdaq was dragged lower.
The immediate culprits, any combination of factors – including a rising belief that a correction has started (a fall of 10% or more from its most recent peak).
But that is all a bit fanciful, at the moment. The big negative is rising fears among speculators about what the end of the Fed’s third round of quantitative easing means for their access to cost free money and cheaply won trading profits.
Nothing much for a short while is the answer, that’s why US markets are focusing obsessively on the timing of the first rate rise since late 2008 – and so are investors and markets around the world.
Trillions of dollars in value in bonds of all types, commodities, equities and other assets are riding on that rate rise.
So it’s no wonder markets are increasingly febrile – and Australia will be no different, for all the easy talk of falling iron ore prices, the weak dollar, and questions about the sustainability of bank profits. They are all important factors, but at the moment market momentum is being driven by surges and falls in investor sentiment in the US.
Overnight Thursday, the S&P 500 fell 41 points, or 2.08%, to 1,928. That more than reversed the 34 point jump on Wednesday.
The Dow Jones Industrial Average lost 335 points, or 1.97%, to 16,659. That fall also more than reversed the 275 points rise on Wednesday, while the Nasdaq Composite lost 2.03%, or 91 points, to end at 4,378.
As a result of that slide, our market will start lower this morning with a 55 point signalled by overnight futures trading.
That Dow fall was the 4th this year of 300 points or more and it clearly ended hopes that Wednesday’s rebound was something more than what it really was – a relief rally based on comments in the minutes of the latest Fed meeting which the market took to believe that the central bank will be keeping rates lower than expected.
That was complicated overnight Thursday by conflicting messages from a couple of senior Fed members – one, a bear claimed there would be a rate rise midway through next year, the other repeated the line in the minutes.
The Russell 2000, the index which measures small and medium cap stocks, hit a 12 month low during trading this morning – it’s weakened for much of the year.
For the Dow, the 335 point fall was the largest drop in more than a year. It has rallied 275 points on Wednesday, but dropped 273 points on Tuesday, leading to the question, where will it head tonight ahead of the weekend?
Not helping was the second piece of bad news from Germany – a 5% plus plunge in exports in August (to go with the sharp, 4% fall in industrial output on Tuesday and the earlier news of a plunge in new orders. Clearly the impact of the sanctions on Russia over Ukraine events, is biting hard in Europe’s biggest economy).
That saw major European markets, with the exception of Germany’s sell off sharply (the German market has already fallen sharply – 10% or more).
US bond yields fell sharply with the key 10 year bond yield again falling to a 16 month low of 2.28%, before retracing to end at $2.33%, slightly up on the 2.31% seen on Wednesday.
That’s despite yet another month where jobless benefit recipients were under the 300,000 mark, considered to be a sign of the strength in the labour market and the economy.
US oil futures fell to 21 month lows in the US – hitting $US85.20, a fall of more than 2% by the time after hours trading had ended. In London, Brent crude fell $US1.33 to end at $US90.05 a barrel, the lowest close since June 2012.
Gold though rose $US18 an ounce to $US1,224 in New York.
Our market is heading for a sell down as well, reversing Thursday’s biggest rise for two months.
Yesterday, the ASX 200 Index rose 55.4 points, or 1.1%, to 5296.7, while the All Ordinaries was up 51.7 points, or 1.0%, to 5293.3.
The Commonwealth Bank rose 1.6% $76.23, Westpac Banking Corporation added 1.8% to $32.87; the ANZ Banking Group was up 1.7% at $31.82, and National Australia Bank ended 1.0% higher at $32.47.
