When markets get some downward momentum, it doesn’t take much bad news to trigger a free fall. At one point we saw the US market free-falling with the DOW falling to almost 1,000 points lower before we saw some buying come back in. The DOW closed 614 points lower (-1.78%), the SP500 down 75 points (-1.70%) and the Nasdaq 330 points (2.19%).
Further selling hit after Evergrande issues triggered strong selling in Chinese markets. Hong Kong closed 3.30% yesterday whilst Mainland China was closed for a public holiday. Issues in China started last year after China slapped strict rules on the Chinese real estate industry. This caused companies like Evergrande to sell properties for steep discounts. Evergrande is now at risk of collapse and being one of the largest indebted companies’ investors are worried about how it will affect world debt markets.
Markets selling is just a build-up of uncertainties. From the FED this week, US debt ceiling issues, US tax increases, high covid cases and weak economic data.
Tomorrow the FED is meeting where we expect them to announce a plan to start tapering their bond-buying. It seems that the market is sending the FED a message. What the market does next will depend on what the FED indicates. Will they give us a clear and slow timeline in winding the bond purchases. Fed Chair Powell will also need to stay on message that interest rates will not go up when the bond-buying ends.
Bidens $3.5 trillion spending and new tax measures could also see some volatility in the market. This and debt ceiling issues will all arise in the next few weeks. With all this playing out it is likely to see the market continue to whip around.
Australian Outlook
The XJO is expected to continue its losses on open this morning following a strong bearish night in the U.S. We are expected to open near 7,150 which puts us just below the key support at roughly 7,200.
U.S futures have edged into the green this morning and coupled with their late session rally to retake over a third of the intraday losses, our market may see that as a sign of stability. This could help us stem the bleeding today.
Market commentary remains mixed, with many holding a “buy the dip” mentality, whilst others expecting further falls into the realm of a ten per cent correction. Our market will head into that territory today, with our open putting us roughly six per cent down from our highs in August. Regardless, all will be looking to the Fed n the 22nd for further commentary around inflation and a tapering timeline.
If we fail here, our next key target is roughly 7,100. Through most of April, 7,100 was the top of a tight consolidation range. This is also roughly where the 200 day moving average comes in.
US Market
US shares fell strongly overnight, with US shares experiencing their largest one-day fall since May. Fears around a pending default from Chinese construction firm Evergrande, who is $US600 billion in debt, as well as the Federal Reserve meeting this week are causing investors to sell first and ask questions later. The Federal Reserve meeting will conclude on Wednesday night Australian time and ‘the Fed’ is expected to announce plans to taper bond buying later this year; this is being seen as a removal of stimulus by markets and could be responsible for some of the recent volatility. There is also an impending debt ceiling for US government spending, with US lawmakers having until the end of the month to raise the ceiling. Every major sector of the S&P 500 closed lower, with strong selling in Energy, Consumer Discretionary, Financials, Materials, and Technology stocks. Utilities saw the least selling.
Tim Michaelides is the Head Trader at Emerald Financial Group.
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