Global Markets Offer Wild Ride For Traders
Globally investors have been jumping from the bull to the bear camps on a daily basis. The week started off negatively with the downgrade of the U.S. credit rating from AAA to AA+, and things got worse when rumours circulated that the French economy was the next to be downgraded. Financials have been the hardest hit, especially those with exposure to European debt, though resource and energy stocks have also had selling pressure, due to the volatile commodities prices. In the U.S. the CBOE Market Volatility Index, known as the “fear gauge” surged to levels not seen since the GFC.
The global money managers have made it clear to governments around the world that they need to get their houses in order, otherwise the markets will face continued volatility. Economies are generally in a better position than back in the days of the GFC, because the corporations that survived have reined in debt and shored up their balance sheets. However there are still issues with bank asset valuations in the U.S. and Europe and then there is the faltering global economic growth.
Commodities prices have been volatile this week, with gold reaching a touch under $US1,800 per ounce, while crude-oil has bounced off the $US80 level and copper prices have bounced off the $US4.00 per pound level.
U.S. Markets
U.S. stock markets experienced the highest volatility in decades. Investors started the week selling after the U.S. credit downgrade, but the Fed has stepped in, pledging to keep interest rates near zero at least through mid-2013, but failed to commit to a QE3 and the central bank also sharply downgraded its view of the U.S. economy. These comments initially pushed volatility higher as traders tried to forecast what is in store for the U.S. in the medium term.
Markets have been wild, as investors have been coming to terms with the U.S. credit downgrade and concerns over the health of the European banks, with the chances of a global economic recession looming large if the global sovereign debt issues are not addressed.
Overnight investors were buoyed by improving weekly employment data, news that rumours of a French downgrade were refuted, and corporate reports also showed improvement. The Dow Jones Index has now closed above the 11,000 level for the second biggest percentage gain this year, and it was the fourth straight move of 400 points or greater, a first in the Dow’s history. In the broader markets the S&P500 index and the tech-heavy Nasdaq closed up over 4%, led by the financials, energy and mining stocks.
Overnight the Dow Jones was up 4.0% at 11,143, the S&P 500 index closed up 4.6% at 1,172, the Nasdaq ended up 4.7% at 2,493, and the smaller cap Russell 2000 was up 5.4%.
European Markets
European stock markets have had a horrid few weeks with the German market down 20% (up from losses of 25%), the French market down 20% (also up from losses of 25%) and in the U.K. the market is down 13% (up from 18% losses). These markets have experienced extreme volatility alongside the U.S. The catastrophic selling in Europe was triggered by fears that France’s AAA credit rating will be the next to be downgraded. Banks across the continent sold off heavily, and concerns also continued to prevail regarding Italian and Spanish government bonds.
The selling has eased overnight as the rumours of a likely downgrade of the French credit rating were withdrawn, which triggered a recovery. Banking shares have begun to recover and finished strongly higher, after being savaged in the previous session. The European Central Bank (ECB) has also arranged an urgent meeting for next week, to discuss the current sovereign debt situation. The ECB continues to buy Italian and Spanish government bonds, in an attempt to stabilise borrowing costs for both countries and easing concerns of the European debt crisis.
Overnight the Stoxx Europe 600 index closed up 3.2%, while in London the FTSE 100 index was up 3.3% at 5,168, the German DAX was up 3.3% at 5,780, while in France the CAC was up 2.9% at 3,090.
Asian Markets
Markets in Asia have broken through key psychological levels. In Japan the Nikkei Stock Index closed below 9,000 and in Hong Kong the Hang Seng Index has pushed below the 20,000 level, while in China the Shanghai Composite Index remains at key support levels. Both Hong Kong and Chinese markets are now in bear market territory, having lost over 20% from their 52-week highs recorded in November.
Overnight in China the SSE Composite was up 1.3% at 2,582, while in Hong Kong the Hang Seng Index was down -1.0% at 19,595 and in Japan the Nikkei 225 Index was down -0.6% at 8,982. The South Korean KOSPI was up 0.6% for the session, while the Indian market was down -0.4%.
Our View For Australia
The Australian share markets continue to be buffeted from the volatile sentiment from overseas, particularly in Europe and the U.S. The S&P/ASX 200 index has crashed through its key support level around 3900 this week but managed to bounce off the 3750 level, which was a pivotal level back in the GFC recovery phase in 2008.
Stock prices have experienced volatility the likes of which have not been seen in a generation. At one point this week we had blue chip stocks down over 30 percent from their April peaks, and this was the trigger for the bargain hunters to step in and the volumes on the index buy side have been huge. Gold stocks have weathered the storm and have been supported by the surging gold price.
There are still concerns that the sovereign debt situation in Europe is out of control and the likes of France may see credit ratings downgrades near term. The ECB meeting next week will be one to watch.
The S&P ASX 200 has traded in a 16 percent range in the past fortnight, which is historic. The line in the sand was drawn mid week around 3750 and the 4000 level remains a pivot key in the short term.
Investors need to be attuned to any resumption in the selling pressure, from any negative leads we may have from key markets in the U.S. and Europe. Traders need to plot a path from here, in an environment where there are concerns over faltering global growth and European debt contagion fears, which could spark the spectre of a double-dip recession.
Our reporting season continues with mixed results and the dividend season is starting soon. The Aussie dollar has given our exporters some reprieve and the RBA has the ammunition to either halt or cut interest rates for the rest of this year. Banks are attractive on a yield basis and have bounced off key support levels, and many blue chip stocks are even cheaper on a valuation basis, plus fund managers and investors alike are still underweight equities.
The markets need to stabilise near-term and sentiment from overseas needs to improve before we fully commit, but there is reason to start accumulating. The S&P/ASX 200 is currently trading at 4200 having bounced off the pivotal support level at 3750 earlier in the week. Key levels for the index next week will be 4250 and 3900.
We said last week readers should get that shopping list out and “be prepared to start accumulating”, and those who did this at the height of the selling mid-week will be very pleased with themselves. Expect to see further volatility going forward, as the market participants weigh the evidence for the direction of the market from here.
Use options strategies to reduce your risk in these volatile times. The MDS Financial Advisory Services team can help with this, and we have also discussed some of the strategies in our Analyst’s Eye Articles recently.
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MDS Financial Advisory Services offers general advice on trading options to generate consistent steady income on your investment portfolio. Call me on 1300 610 024 for further information.
By Michael Hevern
Head of Research
