Credit: Original article can be found here
It looks like it is going to take all day to find the bottom with the S&P/ASX 200 sliding further in afternoon trading to 6708.1 points, a fall of 2.27 per cent. This is now the biggest one-day fall since 15th August, surpassing the falls in early October.
Chief market strategist at CMC Markets, Michael McCarthy says from a technical analysis point of view 6770 points appears to be a key support level for the S&P/ASX 200 index. The index did get up to 6862 on Monday, but could not hold onto the gains.
“The fact that we have dropped straight back through that [level] says a lot,” Mr McCarthy told me.
The next support level is 6635, or about 70 points lower than current, he said. He also believes this trade tantrum is going to last throughout next year.
“The politics of this far outweigh the economics for the White House and that means this is going to rattle on. The economics of it are very straight forward: no one wins in a trade war, but the politics are trumping the economics.” He added that futures markets are slightly higher with London, German, and Dow Jones futures trading slightly higher.
Portfolio Manager at Lucerne Investment Partners, Jerome Lander, tells me equity markets are due for a ”serious correction” within the next three years. And much bigger than today’s 2 per cent fall.
“The market does seem crazy to people who have be around a long time,” he says.
“I could sum it up as a liquidity fuelled rally and an attempt by central banks to extend the rally.” Dr Lander points out Donald Trump (him again!) has been pressuring the Federal Reserve to cut rates even further and provide even more easy money.
“The bull case is basically one thing – low interest rate and easy money – because central banks are so afraid of what will happen if they don’t. I am much more worried about the big picture and the big picture is very worrying. We have high asset prices and we don’t know what will happen when then cycle ends.”
His fund at Lucerne Partners currently holds just 20 per cent equities.
“Under different market circumstances I would run much higher levels of equities. With a three year-plus view I think we have to be seriously worried that we are going to have a correction.”
The Reserve Bank has left rates on hold at 0.75 per cent saying it wants to give previous cuts a chance to work through the economy. It is prepared to cut rates further next year.
Governor Philip Lowe said.
“The lower cash rate has put downward pressure on the exchange rate, which is supporting activity across a range of industries.”
“It has also boosted asset prices, which in time should lead to increased spending, including on residential construction. Lower mortgage rates are also boosting aggregate household disposable income, which, in time, will boost household spending.”
“Given these effects of lower interest rates and the long and variable lags in the transmission of monetary policy, the Board decided to hold the cash rate steady at this meeting while it continues to monitor developments, including in the labour market.”
“The Board also agreed that due to both global and domestic factors, it was reasonable to expect that an extended period of low interest rates will be required in Australia to reach full employment and achieve the inflation target. The Board is prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time.”
Telstra shares have fallen further than then index and are currently down 3.4 per cent at $3.73, down from a peak if $3.86 last week following the investor day. Trading is very heavy in Telstra shares with 22 million traded so far.
Woolworths’ decline has also worsened, it is now down 3.1 per cent to $38.52 and Commonwealth Bank is down 2.2 per cent to $79.60.
Overall the market is down 2 per cent to 6724.3, down by 137.97 points.
The latest export data has met expectations, up 0.1 per cent, while the country’s current account balance is better than expected and increased to $7.9 billion, largely due to the low cost of borrowing money from global markets.
“Australia’s current account was again in surplus in the third quarter, improving upon the revised $4.7 billion (previously $5.9 billion) surplus in the second quarter,” ANZ Bank economists Hayden Dimes and Felicity Emmett wrote in a note to clients.
The current account balance beat expectations due to the income deficit declining from $14.6 billion to $13 billion.
“A large reason for the drop in the income deficit was a significant decline in interest payments flowing out of the country. Net exports will once again add to GDP growth this quarter and, with other sectors remaining weak, further growth in exports will be important for overall growth.”
The Tariff Man has struck again, this time blindsiding and unnerving allies and markets with “Trumped-up” accusations of currency manipulation.
In yet another of his market-shaking tweets on Monday, Donald Trump announced he would “restore” tariffs on Brazilian and Argentinian steel and aluminium exports to the US.
“Brazil and Argentina have been presiding over a massive devaluation of their currencies, which is not good for our farmers. Therefore, effective immediately, I will restore the tariffs on all steel and aluminium that is shipped into the US from those countries,” he tweeted.
In fact neither Brazil nor Argentina have been subjected to the tariffs that Trump imposed, on “national security” grounds, on a range of countries including close allies such as Canada, in March last year. Instead they agreed to quotas that limited their exports to the US.
It is equally the case that neither of the two biggest economies in South America has been manipulating their exchange rates to gain a competitive advantage.
If anything they have tried, albeit unsuccessfully, to support the values of the Brazilian real and Argentinian peso. The value of the real has fallen almost 10 per cent against the US dollar this year, while the peso has collapsed, plunging nearly 40 per cent.
Senior market analyst for Asia Pacific at OANDA, Jeffrey Halley, says equity markets are today caught up in a flurry of negative news, and because Australia’s market was trading at all time highs it was vulnerable to a correction. Asian markets are weaker with the Hang Seng down 1.2 per cent and Shanghai’s index down 0.4 per cent.
“It is just like a perfect storm of bad news coming out,” Mr Halley told me.
“No trade deal visibility. Tariffs left right and centre, and threats of even more tariffs on European partners and poor US manufacturing data has just combined in a perfect storm.”
“It would not have taken much to send the stocks down, a correction is probably a good idea.”
Reuters is reporting the US is now looking to hit France with tariffs:
The U.S. government on Monday said it may slap punitive duties of up to 100% on $2.4 billion in imports from France of Champagne, handbags, cheese and other products, after concluding that France’s new digital services tax would harm U.S. tech companies.
The U.S. Trade Representative’s office said its “Section 301” investigation found that the French tax was “inconsistent with prevailing principles of international tax policy, and is unusually burdensome for affected U.S. companies,” including Alphabet Inc’s Google, Facebook Inc, Apple Inc and Amazon.com Inc.
U.S. Trade Representative Robert Lighthizer said the government was exploring whether to open similar investigations into the digital services taxes of Austria, Italy and Turkey.
“The USTR is focused on countering the growing protectionism of EU member states, which unfairly targets U.S. companies,” Lighthizer said. His statement made no mention of proposed digital taxes in Canada or Britain.
The U.S. trade agency said it would collect public comments through Jan. 14 on its proposed tariff list as well as the option of imposing fees or restrictions on French services, with a public hearing scheduled for Jan. 7.
It did not specify an effective date for the proposed 100% duties.
Shares in the Bank of Queensland have dropped down to $7.55 after falling 2.3 per cent this morning. However, the stock has dropped 12.7 per cent in the past two weeks after it conducted a $250 million institutional placement. It placed 32.1 million shares at $7.78, but was then hit with a wave of pessimistic analyst research speculating the dividend could be cut.
Morgan Stanley analyst Andrei Stadnik has a $7.50 price target on the bank. After the capital raising he noted Bank of Queensland’s dividend payout target is up to 80 per cent of cash earnings.
“We have a 74 per cent payout for 2019-20 estimated and our 50 cents per share dividend is ~10 per cent below consensus (~80 per cent payout),” he wrote.
“Because first half 2019-20 statutory profit will be below cash profit, BOQ needs APRA
approval to pay its desired dividend,” he added. The bank declared a final dividend of 31¢ on October 17 that was paid on 27 November. This was the lowest dividend since 2013.
The Australian dollar is up against all major currencies this morning and at a two-week high against the US dollar at US68.21¢. Don’t forget there is a Reserve Bank Board meeting today with an interest rate decision at 2.30pm. Economists do not expect a change in target cash rates from the current level of 0.75 per cent. If there is a surprise change (and this current board has never surprised) there will be an immediate drop in the Aussie dollar.
On currencies, the New Zealand dollar is currently at four-month highs against the US dollar, trading at US65¢. This is because the US dollar softened overnight and US government bonds declined, with 10-year yields climbing the most in more than three weeks.
The index got as low as 6725.6 points just before 11.30am, but is now at 6739.9, a fall of 1.8 per cent. Japan’s Nikkei has just come on line and is down 1.1 per cent. The Hong Kong and Chinese markets will soon open.
It’s also worth noting the volatility index (VIX) spiked 17.2 per cent overnight to 21.8 points, the highest it has been since 11 October.
On the Australian market consumers staples are down 2.6 per cent while utilities and information technology are down 2.3 per cent. This is a broad based sell off with low volumes, less than 200 million shares traded so far today, the average daily volume is 630 million.