What we liked
- Dead cat bounce? After a 1597 point tumble on the Dow, the index has mounted a 567 point recovery on Tuesday night. Volatility hit multi-year highs. Whilst many were saying the storm appears to have passed, the US market tumbled again on Thursday falling 1033 points. Could it have been a dead cat bounce? Investors are calling the sell-off a mere correction of what was an overcooked market. The idea that interest rates are now going to rise due to inflation pressures was the catalyst the market was looking for to sell. The US market has had 12 positive consecutive rises without falter, it has rallied 40% since Trump was elected. So a correction is long overdue. The froth has been taken off and the bulls are trying to fighting back. On Monday stocks on the Dow opened in the negative and swung into the positive giving the index more than 1,100-point difference between the high and low for the day. The market is trying to find a bottom.
- The Australian dollar pulled back this week to a 2 month low at US$78.91 following the sell-off in risky assets and bonds. Investors factoring in a few more rate hikes in the US than was previously expected. The lower dollar is a positive for the Australian economy, it gives exporters a leg up allowing their goods an advantage compared to economies with a higher currency
- Prices for inner city apartments are being hit hard. Sellers are lowering prices on high rise inner-city apartments by up to 10% and advisers are being offered $10,000 commissions to recommend apartment sales. Builders are also including free luxury fixtures and lenders are adding in incentives to lure investors. NAB is offering 50,000 bonus Qantas Points as part of their Choice Home Loan Package to drive sales volumes. Despite the incentives and push to increase sales, apartment sales are on the nose with Brisbane and Melbourne recording falling demand and over-supply. It’s a positive for buyers that have been looking to enter the property market but have been locked out due to sky high prices.
- Bitcoin was hit hard this week falling below US$6000 after the Bank for International Settlements’ head labelled it a ‘Ponzi scheme’ that poses a threat to financial stability. The cryptocurrency has recovered a little from three-month lows but there are concerns regarding a global regulatory clampdown and backlash by banks banning buying bitcoin with credit cards. Big credit-card issuers have stopped purchases of cryptocurrencies on their cards, including JPMorgan Chase and Bank of America. Other cryptocurrencies weren’t immune. Ripple, Ethereum and Litecoin have all lost ground. The other point to note is that Bitcoin is struggling to live up to its hype as being a safe store of wealth or replacement for gold. Whilst markets were crumbling, Gold went up but Bitcoin continued to fall. The argument made by Bitcoin lovers has now been proven wrong. It’s a positive Bitcoin sceptics.
- The currently volatility seen in global markets and on the VIX Volatility Index has not shaken the RBA’s view of our economy. The central bank is still optimistic on corporate earnings growth. Whilst global stock prices had fallen as bond prices rose, equities still remain higher than they were a year ago. The RBA is confident that the global economy will strengthen expects ongoing growth in corporate earnings over the next few years.
What we didn’t like
- The Dow Jones saw two of its biggest one day falls in 6 years. On Monday night the Dow fell 1,175 points or 4.6% and then fell 1,032 points or 4.15% on Thursday. On Monday, the Dow at its worst was down 6% or 1597 points as Friday’s sell off widened. Investors took profits and sold off equities and moved to the safety of bonds and cash bringing the market back down from record highs seen in late January. Bond yields have now risen to a 4 year high and are at around 2.80%. The market still hasn’t found a bottom to this madness. The Dow Jones Index closed down The S&P 500 has closed down 10.17% which confirms the US market is now in correction territory.
- The Australian sharemarket followed suit dropping 95 points on Monday and 170 points on Tuesday. That’s roughly a 3% fall. Monday becoming the worst day the ASX has had since June 2017. The share market rout on Monday wiped $56 billion off the value of the stock market as panic selling kicked in. Rising US interest rates, rising inflation and bond yields were all to blame. Financials were the worst performers by sector but resource-sector stocks too saw heavy selling.
- Morgan Stanley has a bearish view of the Australian market for this year. The broker says at 6000 points, the Australian market demanded better earnings growth to justify the multiples it was trading on. So their target is 5800 points for the ASX 200. The broker is a buyer of weakness in energy and global growers, value over bond proxy defensives and cautious on domestic cyclicals.
- The Living Cost Index of wage-earning households rose by 0.7% in the December quarter which was above inflation of 0.6%. Higher living costs were driven by a rise in petrol and transport which are rising at their fastest pace and well above growth in wages. And it’s not just the cost of living that has gone up. Australian capital cities including Sydney, Melbourne, Adelaide and Hobart are all a lot more expensive over the past year compared to the rest of the world. According to website Numbeo.com, Sydney is now the 32nd most expensive city in this year’s Cost of Living Index. It is up from 41 last year. Melbourne rose to 64 up from 77. Only Perth (56), Darwin (68) and Brisbane (93) are affordable.
- Algorithmic computer traders are fueling Wall Street disasters by executing thousands of stock orders each instant helping stimulate the latest meltdown. The sudden and sharp corrections on both Monday and Thursday nights are partly being blamed on computer algorithms. Computer algorithms that are programmed by humans. The expectation was that if yields or interest rates reached close to 3% there would be a switch out of equities towards bonds. With Friday’s payrolls data, it sent bond yields soaring to 2.9%. It’s at this point that the algo’s orders kicked in and traded out of the equity market and into the bond market. This sent the market falling. The price decreases triggered stop loss orders, which exacerbated the market fall to an even bigger fall.