ASX poised to rebound after Wall Street surges in late trade

Locally, the Australian sharemarket is poised to open higher on Wednesday, with futures pointing to a 62 point, or 1.1 per cent gain, at the open.

"Put your seatbelts on. It's going to be a volatile ride for the next several trading sessions," said Chad Morganlander, portfolio manager at Washington Crossing Advisors in New Jersey.

"Fundamentals are moving forward in a positive way, which gives us confidence that in the long run you'll continue to see higher highs within the markets."

"It's been a crazy period and today the market is probably just trying to find some footing," said John Lynch, chief investment strategist at LPL Financial.

The Dow Jones fell as much as 500 points in early trading but quickly recovered much of that loss.
Photo: RICHARD DREW

Sharp falls, including Wall Street's drop of more than 4 per cent on Monday, have come despite generally positive economic news around the world. There is strong growth on every continent, interest rates are at or near record lows, and the US has just passed a sweeping tax overhaul that will significantly lower corporate taxes. President Donald Trump has touted seemingly unending stock market highs as proof of improved economic prospects.

But those positive factors have also, in part, created the circumstances for the recent sell-off. Accelerating growth means central banks are gradually looking to take away economic stimulus, and rising interest rates could eat into corporate profits. Workers, meanwhile, are increasingly demanding their share through wage increases.

The record falls reverberated around the world including Tokyo, where shares tumbled on Tuesday for another wild day.
Photo: SHIZUO KAMBAYASHI

The declines were made worse by panic that stock values had peaked, that a correction was underway, and that investors would suffer even bigger losses if they waited too long to dump their holdings.

While Trump has regularly pointed to increasing share prices as a sign of a strengthening economy, Vice President Mike Pence dismissed the latest falls on Wednesday as simply representing "the ebb and flow" of stock markets.

Pence, who was speaking to reporters as he headed to Asia, said that the US economy remained strong, pointing in particular to record-low unemployment and signs of accelerating wage growth.

Traders, however, appeared to be preparing for another unsettled day.

The Dow Jones industrial average fell more than 500 points after the opening bell, but swiftly recovered those losses. The Standard & Poor's 500 and Nasdaq also registered short-lived losses.
Wall Street's so-called fear gauge, the VIX index, shot up to its highest level since early 2009. The index tracks overall market volatility.
European shares fell in morning trading after sharp declines in Asia. Stock markets in Frankfurt, London and Paris all declined by around 2.5 percent by midday in Europe.
Japanese shares were down about 7 percent at one point, before ending 4.7 percent lower, while Hong Kong and Taiwan closed down about 5 percent.
The selling was broad, hitting companies of all sizes across many industries. An index of Chinese businesses listed in Hong Kong fell nearly 6 percent, while shares of all 30 companies listed on Germany's benchmark DAX index were down.

In Europe, a decade of extraordinarily low interest rates is coming to an end. The European Central Bank is winding down the money-printing program known as quantitative easing and could begin raising its benchmark interest rate - currently zero - next year.

That would have two impacts on the stock market. For one, companies - some of which have been able to issue bonds paying little or no interest - would have to pay more to borrow in the future, which could cut into profits.

At the same time, higher interest rates are making bonds more attractive as an investment, prompting investors to shift some of their money out of stocks. The yields on 10-year bonds, which move inversely to prices, fell across Europe on Tuesday, indicating increased appetite for the investments.

"Gradually the realisation is dawning that the era when monetary policy provided unlimited support to markets is coming to an end," Michael Heise, chief economist of German insurance giant Allianz, said in a note to clients on Wednesday.

An improving economic outlook has also meant European unions are demanding relatively hefty pay increases after years in which they settled for stagnant wages in return for job security. The IG Metall union in Germany, which represents workers at big companies like Daimler and Siemens, negotiated a new contract on Wednesday that provides for an effective annual pay increase of more than 3 per cent through early 2019.

The contract applies only to workers in the state of Baden-Württemberg, in southwest Germany, but it will serve as a model for agreements in other German states.

Christian Hille, a senior fund manager at Deutsche Asset Management in Frankfurt, said that much of the selling was by investors compelled to move out of stocks for technical reasons - for example, because they manage a fund that has an obligation to limit losses to 2 or 3 per cent.

"We think that the movement is a bit overdone," said Hille. He predicted that stock markets would eventually settle down because of the strong global economy.

"We are seeing a synchronised global upswing, which will be supported by US tax stimulus," he said. "We expect higher corporate profits."

Analysts digesting the numbers from Asia said they did not expect the selling to let up anytime soon.

"This is the beginning of a more meaningful setback in a market that was, at least from the non-financial sectors, very overvalued and there was a lot of euphoria," said Jonathan Garner, an Asia and emerging markets equity strategist at Morgan Stanley.

"I don't think this is a 'one-day' that finishes today," he added.

Investors seem mostly to have been spooked by concerns about the potential for rising inflation in the United States. Still, the share run-up of recent months has been global, and experts said a number of markets elsewhere were also due for a readjustment.

In China, in particular, markets were overheated after a steep rise since the start of this year, said David Cui, China equity strategist at Bank of America Merrill Lynch.

"Given how bullish the market has been positioning, there could be a reasonable period of adjustment," Cui said, referring to Chinese stocks.

"It's not going to be a two-day phenomenon," he added. "If you take a few-months view, there is a chance this is the start of a decent correction."