A bearish day: It was a hectic day on the dealing floor, yesterday. Several surprises smacked markets during early Asian trade, and the subsequent 24-hours has since belonged to the bears. The “slower global growth” narrative is gaining momentum, driving traders from riskier assets into safe-havens, as fear snowballs. The VIX is well off its highs from last week, but it did lift overnight, nevertheless, with price action indicating the markets are bracing for further pain. Overall, it was mostly one-way traffic for equity markets – the exception being the ASX, which stands out amid the sea of red, for reasons soon to be discussed. However, yesterday’s rally will likely prove the exception to the rule, as SPI Futures prepare Australian investors for a 38-point fall for the ASX200 this morning.
ASX bucks theme: Trade was thin in Australian markets during Thursday’s session, as can be expected this time of the year. Despite the doom and gloom stifling the rest of the financial world, the ASX200 performed quite well. The index closed 1.36 per cent higher for the day, closing above a cluster of resistance levels at 5633, on solid breadth of 79 per cent. There was a touch of debate as to how this could happen on a day of bad news, and where US Futures were getting pummelled. The best answer came from the Twittersphere: the tumble in the AUD combined with the big-fall in ACG bond yields increased the attractiveness of Australian stocks, as a lower currency and its effect on earnings, coupled with lower discount rates, improved the relative value of equities, translating into a general lift in the ASX200 index.
A flash-crash? Nerves were rattled early in the Asian session by what is being dubbed a “flash crash” in currency markets. It’s a very emotive phrase, “flash crash”, eliciting thoughts of the Swiss Franc’s collapse in January 2015. But it’s the one the financial press is running with, and it isn’t entirely inappropriate, though the scale of the issue was perhaps overstated. It was a rapid and unfortunate chain of events that precipitated the “crash” yesterday and unfolded quickly: roughly in the space of 10 minutes did the AUD/JPY plunge over 7 per cent – really, an almost absurd move in what is a relatively liquid currency pair. Similar moves were witnessed in the USD/JPY and emerging market currencies, causing chaos in currency markets temporarily.
A chain of events: An explainer of the series events is warranted, with the caveat that the description is simply the markets best guess about what happened. Apple Inc.’s poor results and singling out of Chinese economic weakness as one cause inspired a sell-off in growth/risk currencies. The unwinding of the JPY carry-trade as traders sought safety bid-up the price of that currency from what were already extreme levels. Because of the time of the day and that Japan was on a bank holiday, liquidity was very thin, leading to some turbulent trade and a widening of spreads. It seems that a bundle of large “stops” were blown out at key support levels in the currency pairs impacted, causing a cascade effect. From here, it is being speculated that the algos took hold, following the momentum of the market and exaggerating the move.
Apple Inc.: The 30 minutes of madness was unsettling and sapped sentiment, however despite presumably broad individual losses, it wasn’t indicative of anything sinister on a grander scale. Traders apparently were able to acknowledge this, and focused their attention picking apart the major-underlying story: Apple’s cut of its Q1 revenue guidance. In the details, the statement released by Apple CEO Tim Cook outlined several company specific problems that led to the revenue downgrade, ranging from a stronger USD, poor timing of product releases, and a reduction in sales due to supply constraints. The matter is nuanced, with many equity analysts breaking down the company’s micro issues. Traders though clung on to one detail in particular: the allusion to a weaker Chinese economy as a cause for the company’s woes.
An economic slowdown: The news confirmed a strong bias held by market participants: that the global economy is slowing down at a rapid rate. In unfortunate circumstances, last night’s release of US ISM Manufacturing PMI – a powerful forward-looking indicator of economic activity – showed a remarkably weaker than expected print. It added fuel to the notion that a cyclical economic slowdown in both the US and China, exacerbated by those two countries’ trade-war, is upon us. The confluence of events has driven traders from equities into safe havens. Both European and US stocks were down, gold has burst higher to $US1293, the Yen has climbed across the board. Most significantly, US Treasuries have rallied, bending the yield curve into a very ugly shape, as traders price in the prospect of Fed rate cuts in 2019.
Markets are fearful: This isn’t written flippantly: markets are demonstrating price activity that suggests traders are preparing for a US recession. Under what other circumstances would a 50 per cent chance of an interest rate cut in the next 12-months be priced into the market? Absolutely, markets could be entirely wrong – it’s a philosophical debate as to whether markets are a predictive measure for the economy, and whether they are capable of processing and reflecting the necessary information to signal things like recessions. Regardless, sometimes perception is reality, as the cliché goes, so whatever truth, the market believes a major economic slow-down is nearing. It makes tonight’s US Non-Farm Payrolls and US Fed Chairperson Jerome Powell’s speech even more interesting. Will further confirmation come that US and global growth is truly slowing?