By Greg Peel
The Dow fell 170 points or 1.1% while the S&P lost 1.6% to 1630 and the Nasdaq dropped 2.0%.
There has been little in the way of "traditional" trading on global markets since the GFC, with global QE turning the world upside-down. Record low interest rates have, for example, forced a rush for yield in both equity and fixed income not seen in most lifetimes. Most recently, the prospect of Fed tapering of QE has seen both stocks and bonds fall in unison, which is counter to the way markets respond under normal economic conditions. Last night, however, the world went onto a "traditional" war footing.
The West is still not clear how to respond to Syria. There is no intention of affecting a regime change, as this would not be supported by UN Security Council members Russia and China, not Syria's major ally Iran. The US has been reluctant to engage in Syria to date on the excuse that it is a civil war, but realistically in light of an already stressed budget and a war-weary population. How one thus responds simply to the use of chemical weapons and not the Syrian civil war itself is problematic.
The threat of a war traditionally evokes an initial "risk off" response, as investors rush into safe havens. These include gold, US bonds, the Swiss franc and, more recently, the Japanese yen. War also implies a demand-spike for oil. Despite assurances of "no US boots hitting the ground", assurances of no plan for a regime change from the UK among others, and no real threat of the allies attempting to "do an Iraq" in Syria, global markets were not distinguishing one war from another last night.
The US ten-year bond yield fell 8 basis points to 2.72%. Gold rose US$11.80 to US$1415.80/oz. The Swiss franc and Japanese yen surged, sending the US dollar index down 0.3% to 81.15. Brent crude jumped US$3.63 to US$114.36/bbl and West Texas jumped US$2.96 to US$108.88/bbl. US stocks fell sharply.
It must be noted that while US stocks fell, they were not particularly "sold off". Volume remained summer-modest, suggesting more of a withdrawal of buyers to the sidelines than a wholesale exit. It should also be noted that if this traditional response plays out, all will reverse once the war actually begins. But then it's not likely to be a "war" as such, and as such a reversal may transpire quickly.
The problem is the Syria situation could not have come at a more delicate time. Fed tapering, the US debt ceiling and the upcoming German election are sufficient reason in themselves to create enough uncertainty to send investors to the sidelines. Realistically, Syria has suddenly removed those willing to buy stocks at lower levels on the opportunity presented by such uncertainty. They are still willing, but there's no need to rush in right now. For the sellers, Syria is the last excuse needed.
In what became side issues last night on Wall Street, the Conference Board consumer confidence index rose to 81.5 from 80.0 when a fall to 78.0 was expected, the Case-Shiller house price index rose 0.9% in June for a 12.1% year on year gain, and the Richmond Fed manufacturing index surged to plus 14 from minus 11 in July.
Just when you thought US economic data were weakening, they strengthen once more. Tapering?
Base metals reopened in London after the long weekend and fell slightly, by less than 1% across the board. Spot iron ore fell US10c to US$138.60/t.
The SPI Overnight fell 55 points or 1.1%.
September is historically the worst month of the year for stocks, and October brings chilling memories. Why wait, when you can panic in August? Views of the immediate outlook are currently divided between those who believe the Syria thing will blow over very quickly, and those who were expecting a more significant market pullback on September uncertainty anyway, and see Syria as simply a catalyst.
Whatever the case, stock markets do not go up on uncertainty.
Australia will see the release of June quarter construction work done today in the lead-up to next week's GDP release. The results season continues, and today's highlights include AGL ((AGK)), Ausdrill ((ASL)), BC Iron ((BCI)), Charter Hall ((CHC)), Prime Media ((PRT)) and Woolworths ((WOW)), among the many.
Rudi will appear on Sky Business this evening at 5.30pm.