The only word to describe the trading on the US market overnight is brutal.
The Dow was off 2.08%, the S&P 2.28% and the Nasdaq -2.6%, logging its first 100-point loss since November 2011, and was down 107 points by the close.
This is the worst start to a February on the US market since 1933, with the S&P off 5.5% year-to-date. One fact to be aware of is the S&P hasn't had a 10% correction since May 2012; in that same time the Nikkei has had three, and the ASX two. A further 4.5% isn't that hard to find for the US market, and this will heap more pressure on risk markets.
Several pieces of data last night drove the red on screen. A much weaker-than-expected ISM manufacturing PMI read of 51.3 versus an anticipated 56.2, plus last month's 57 stoked fears. That was the lowest PMI read since July last year. The bears are pointing to tapering as the reasoning for the slowdown in manufacturing; however a strong case can be made for the cold snap throughout North America for the drop. What has also added to the interest is Dallas Fed president Richard Fisher stating the equity decline doesn't change his support for tapering. The FOMC is focused on the real US economy, not the equity market. As a voting member this will have serious weight in aftermarket trading.
What did not help trade in the equity markets was news from General Motors that January sales dropped 12% versus estimates of 2%, with Ford seeing sales fall by 7% versus a 1% drop. The loss of sales from America's two major car providers just added to the concern around US manufacturing and the economic landscape post-QE monetary stimulus, and helped accelerate the decline.
This is leading to a strong rally in the VIX index; it jumped to 21.1 from 18.0, up 13% overnight and is now up 64% since January 24. Volatility is creeping up as are option premiums as investors look to hedge risk. This will be one market to watch over the coming weeks as to how expensive it becomes to de-risk.
The commodities space hasn't escaped the sell-off, with copper off for the ninth consecutive day; it hasn't suffered a ten-day losing streak since 1997 and it looks like breaking this record. Aluminium, nickel and zinc all suffer a similar fate, as industrial metals continue to suffer a red start to the year.
We are going to have to ride out this negative pessimism for a while to come, as it looks likely that February will be a fairly red affair.
Ahead of the Australian open
The RBA will be key to currency and equity trading today. All eyes will turn to the statement rather than the rates decisions, which is unlikely to be moved. The easing bias that has remained in the final paragraph could be no more; this will be the first time in 13 months the RBA has sound a true neutral tone.
Housing prices and inflation have indeed risen, and the AUD has fallen to a 'more acceptable level' - three parts the RBA has been hawking on for most of the later part of 2013. Will the alignment of the three be enough to cut the easing calls? The pair to watch is AUD/NZD after having seen a pop on the RBNZ's decision not to raise rates, and now the RBA tuning neutral. A neutral call is likely to push the equity market further into the red as investment funds are tightened further.
Currently we are calling the market down 95 points on the 10am bell (AEDT) to 5093, -1.83%; this will be the lowest print on the local market since July last year and will see the ASX down 257 points year-to-date.
Like with the US markets, the negative sentiment is unlikely to subside in the near term, and until I see some form confidence returning, the slide is likely to tread its own path.
Price at 6:00am AEST
Change Since Australian Market Close
US DOW (cash)
US S&P (cash)
UK FTSE (cash)
German DAX (cash)
Japan 225 (cash)
Rio Tinto Plc (London)
BHP Billiton Plc (London)
BHP Billiton Ltd. ADR (US) (AUD)
US Light Crude Oil (February)
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