Wall St was savaged for most of Monday’s trading, before making a remarkable comeback. In the end stocks rose with the Dow Jones Industrial Average erasing a loss of approximately 1,115 points to end in positive territory. In fact, all major indexes enjoyed sharp intraday reversals.
The Dow finished with a gain of around 99 points, or 0.3%, near 34,365 after dropping 3.3% at its session low.
The S&P 500 was 0.3% higher near 4,410, after falling 4% at its session low while the Nasdaq Composite was up 0.6% near 13,855 after erasing a drop of 4.9%.
These highs and lows yesterday certainly speak to the volatility of the market.
deVere Group’s Nigel Green believes global markets will be mixed all week.
“After the dramatic recent volatility during which global stock markets recorded their worst week in more than a year, markets will be more settled again this week,” Green says.
“They will be in a holding pattern for much of the week as investors wait and see the outcome of the Fed’s meeting on Wednesday.
“Many will be preparing to commit new capital to build portfolios as history teaches us that US equities perform well when the Fed raises rates, as a growing economy typically supports corporate earnings growth and the stock market.
“Sentiment will also be muted as investors await earnings updates over the next few days from titans including Apple Inc (NASDAQ:AAPL), Boeing and Deutsche Bank, amongst others.
“The next weeks will continue to be defined by a rotation towards value stocks.
“After years of growth stock outperformance, many investors are changing their mind and move towards cheaper stocks which are based on earnings and cash flows.
“Major policy announcements and big corporate updates will mean that global stock markets will be mixed this week, but more settled than in the first few weeks of 2022.”
As for the ASX today, it is expected to drop after dropping to its lowest point in eight months on Monday.
Australian investors seem wary of the Fed and RBA’s moves to raise interest rates and end the stimulus fuelling growth stocks.
Turmoil in the Ukraine as the world waits to see whether Russia invades or not is also having an effect. US and Australian citizens living in the Ukraine have been told to evacuate.
The posturing by Russia has put Europe’s energy supply under threat.
“If gas is restricted, that will increase energy costs in Europe, which are already elevated and would lead to higher inflation,” senior economist at AMP Diana Mousina said.
Here’s what we saw (source Commsec):
- The Aussie dollar fell from highs near US71.80 cents to US70.90 cents was near US71.40 cents in late US trade.
- Global oil prices fell by near 2% on Monday on jitters ahead of the US Federal Reserve meeting.
- A stronger US dollar made commodities more expensive for buyers in Asia and Europe. Adding to investor jitters was news that the United Arab Emirates intercepted and destroyed two Houthi ballistic missiles targeting the Gulf country on Monday.
- The Brent crude price fell by US$1.62 or 1.8% to US$86.27 a barrel.
- The US Nymex crude price fell by US$1.83 or 2.1% to US$83.31 a barrel.
- Base metal prices fell on Monday by between 0.3-6.8% with aluminium down the least and nickel down the most.
- The gold futures price rose by US$9.90 or 0.5% to US$1,841.70 an ounce.
- Spot gold was trading near US$1,842 an ounce at the US close.
- Iron ore fell by US$3.70 or 2.7% to US$133.70 a tonne.
Australian markets
The S&P/ASX 200 dropped 0.5% to 7139.50 and is down about 4% since January 1.
Yesterday, it fell as low as 7086.8 in the session, a level last seen in May. This follows a 2.9% decline last week – the biggest weekly decline in 14 months.
According to Joseph Palmer & Sons director Alex Moffatt, “Action on the local bourse yesterday was surprisingly quite subdued. The ASX200 trading in an 87 point range and closed down just 36 points. There were some big falls, Regis Resources Ltd (ASX:RRL) -14.3%, Resolute Mining Ltd -11.3% and Nuix Ltd down 6% and some solid gains too by Goodman Group (ASX:GMG) 3.5%, Domino’s 2.5% and REA Group 2.9%.”
Moffatt says we should all be on the lookout for today’s inflation report.
“At 11:30 today the Reserve Bank will release the December quarter inflation report. The Bank’s preferred measure, the trimmed mean, sits at 2.1% after a 0.7% rise in the September quarter. The trimmed mean excludes 8% of the components from either end of the measure which have the most extreme price moves and is seen by the Bank as a far more relevant measure of inflation.”
High oil prices hit motorists
As you would expect, petrol prices around the country are on the rise ahead of the Australia Day holiday. However, it’s not just petrol stations gouging motorists this year that have pushed prices so high.
Global instability, supply issues across oil producing nations, the northern hemisphere winter and Omicron are all having an impact.
“After lengthy periods at home over the last two years, Australians are getting back on the road, predominantly for work, and they’re now facing some of the highest prices in history, paralleled by rising gross margins,” NRMA spokesperson Peter Khoury said.
“Sydney again reached its record high price leading up to Australia Day and other capital cities are heading in the same direction. Whatever short-term relief motorists enjoyed leading up to Christmas has well and truly past.
NSW extends restrictions
NSW Premier Dominic Perottet has extended COVID-19 restrictions for a further month in a move designed to combat the return of children to school this week.
“These measures are proportionate, but particularly they’re taking a cautious approach as we move through and really focus on getting kids back in the classroom on the first day of school this year in a safe way,” Perottet said.
“As well making sure that we get that non-urgent elective surgery back.”
US markets
The US indices made a spectacular recovery yesterday.
Fears that this week's Federal Reserve meeting would lay the groundwork for a rate hike as early as March sent shares spiralling in early trade.
Oversold conditions can be partly attributed to the turnaround.
For instance, the Dow industrials produced a seven-day plunge that marked its most oversold reading in a key technical indicator in nearly two years. This sometimes results in bargain hunting by speculative investors and technical traders look for opportunities.
“Look at this oversold condition that we’re in, and the longer-term upward trend that the market is still in, and combine that with the fact that credit spreads are so well-behaved right now,” chief market strategist at Crossmark Global Investments, Victoria Fernandez told Bloomberg Television.
“There’s still some support for the equity markets, there’s just going to be quite a bit of volatility.”
Morgan Stanley (NYSE:MS)’s Michael Wilson says January’s rout still has a way to go saying markets were set for a drawdown in the midst of tighter policy and decelerating economic growth.
According to JoAnne Feeney, partner at Advisors Capital Management, “There’s certainly a lot on the table this week, and I think the market behaviour and all of these risks that they’re facing really is testing the mettle of the long-term investor,” she told Bloomberg.
Tech has been hardest hit, with Netflix, Tesla and Nvidia all losing more than 5%. Big name tech stocks are being hammered by a surge in Treasury yields.
Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder, is hoping the Fed will calm the markets.
“I’m hoping the Fed will calm markets at its meeting because the selling has been so massive that it has scared away the dip buyers. There’s been a lot of panic selling, aggressive selling, though I think that when it does reverse, it could reverse very quickly.”
According to Guggenheim Capital CIO Scott Minerd, The Fed will focus on its balance sheet more than anything else.
“What amazes me is that the Fed would even consider an attempt to raise rates and reduce the balance sheet simultaneously given how badly the last episode of balance sheet reduction played out in the markets while the Fed raised rates in 2018,” he wrote in a research note.
“An unexpected shock is not going to immediately flow through to inflation, but it will immediately impact already overvalued financial asset prices and undermine confidence and destabilise the economy.”
Minerd believes inflation will be transitory.
“Clearly the markets have become a speculator’s paradise. Meme stocks, CCC bonds, art, houses, almost anything that can be named has skyrocketed.
“The surge in prices – first written off as transient due to supply chain and other pandemic dislocations – now may prove to be a resilient and sustainable feature of the post-pandemic recovery.
“Any program to raise rates will require the Fed to raise the rate of interest paid on RRP operations by the amount of the increase in the overnight target rate.”
European markets
Given the situation in the Ukraine, European markets slumped.
Investors are citing fears of a Russian attack on Ukraine and uncertainties about this week's meeting of US Federal Reserve policymakers.
The travel & leisure sector fell by 5.4% and technology fell by 5.8%.
The pan-European STOXX 600 index fell by 3.8% - the worst day since June 2020. The German Dax index also fell by 3.8%.
In the UK, the FTSE index fell by 2.6%. UK markets were supported by a 4.5% lift in shares of Vodafone and 7.3% lift in Unilever.
In London trade, shares in Rio Tinto fell by 3.5%. Shares in BHP fell by 3.7%.