ASX set to extend losses on more selling on Wall Street

Australian shares are poised to extend their losses, amid further losses on Wall Street. ASX futures were down 100 points. The Dow was 1100 points lower at on one point in late trade in New York, after having lost 666 points on Friday. The Australian dollar briefly slipped below the US79¢ mark overnight.

Losses accelerated on Wall Street. With less than 45 minutes ahead of the closing bell, the Dow was 818 points lower - it pared losses that had sent it sharply lower at 3.05pm (7.05am AEDT).

"Friday's sharp decline, the biggest since the Brexit vote in June 2016, might have some of us forgetting that just a few days ago the stock market was considered by some to be melting up," LPL Financial said in a morning note ahead of the drop.

"The strong finish to 2017, followed by big gains in January, certainly left some investors feeling like last week's 3.8 per cent pullback in the S&P 500 Index was a market meltdown," LPL added. "We, however, do not see the makings of a significant stock market top or major downturn. In fact, we view last week's decline as a normal, healthy, and overdue pullback.

"While we suspect market weakness could persist in the coming days (or even weeks), we continue to believe stocks are well supported by strong fundamentals, expect gains over the rest of 2018, and maintain our fair value S&P 500 range of 2850-2900." The S&P 500 was at about 2730 in early afternoon trade in New York.

In Washington overnight, Jerome Powell was sworn in as the 16th chairman of the US Federal Reserve amid 'Goldilocks conditions'.

Separately, bitcoin slumped, sliding below $US7500 as more credit-card issuers ban purchases on cryptocurrencies.

For local investors, activist investor Elliott Management has called on BHP Billiton to immediately review its dual structure after commissioning research that argues reorganising as a single company in Australia would add more than $US22 billion in value to the miner's shareholders.

In addition, policymakers gather for the RBA's first board meeting of the calendar year. The 1.5 per cent cash rate is seen on hold. The bank will release updated GDP and CPI forecasts in its Statement on Monetary Policy on Friday.

The key will be what the RBA has to say about the Australian dollar. TD Securities said it expects the RBA "to reiterate that a firmer AUD is expected to contribute to subdued price pressures. However the RBA is UNLIKELY to repeat that the AUD appreciation IS weighing on the outlook for output and employment as it did in the Sep'17 when the AUD hit US81¢."

So what to think of Wall Street's slump?

So far not much, wrote Capital Economics' John Higgins as well as Yardeni Research's Ed Yardeni.

The S&P 500 "remains 3 per cent higher than it was at the start of 2018 and nearly a quarter above its level at the start of 2017, before it went on a tear. So the correction seen over the past week is hardly a reason to panic", Mr Higgins noted, and no reason for a Powell "put".

"The stock market was roughly 35 per cent lower in late October 1987 than in early August of that year when Alan Greenspan was sworn in as Fed chairman. The central bank's response to the collapse in the stock market that autumn, which succeeded in calming the equity market, was the first example of what came to be known as the Greenspan put. Only if the S&P 500 fell well below 2000 would Powell have as good an excuse today as Greenspan did in 1987 to try to stabilise the markets."

Mr Higgins said "Overall, we are not convinced that this is the start of a major correction in the stock market, as the fundamentals remain healthy for now: bear markets have typically occurred just before the onset of a US recession (although 1987 is actually an outlier in this regard)."

Still Mr Higgins is not bullish either: "... we think that tougher times for equities are not far ahead, as Fed tightening is likely to take a toll on the economy before long. We are therefore sticking to our end-2018 forecast of 2600 for the S&P 500."

As for his part, Mr Yardeni said he's not yet calling a top in the bull market either.

"Whatever might be the short-term follow-up (or -down) on Friday's drop, I remain bullish because the outlook for earnings remains very upbeat," Mr Yardeni said.

"Industry analysts have raised their consensus S&P 500 earnings estimate for 2018 by $US9.00 per share over the past seven weeks to $US155.26 during the week of February 2. That's mostly on guidance provided by managements during January's Q4-2017 earnings season about the very positive impact of the corporate tax cut enacted late last year. The actual Q1 earnings season is still ahead, starting in April. By then, corporations are likely also to report that the weak dollar (down 7.7 per cent y/y) has boosted their earnings," Mr Yardeni said.

Today's Agenda

Local data: Trade balance December, Retail sales December, RBA cash rate decision

Overseas data: German factory orders December; US Trade balance December

Market Highlights

SPI futures down 100 points or 1.7% to 5855

AUD -0.3% to 78.99 US cents (Overnight low: 78.91)

On Wall St: Dow -3.4%, S&P 500 -2.7%, Nasdaq -2.3%

The Dow: Exxon -5%, J&J -4.1%, Pfizer -4.1%, Chevron -3.8%

In Europe: Stoxx 50 -1.3%, FTSE -1.5%, CAC -1.5%, DAX -0.8%

Spot gold +0.1% to $US1334.45 an ounce

Brent crude -1.4% to $US67.63 a barrel

US oil -2.1% to $US64.05 a barrel

Iron ore +1.8% to $75.70 a tonne

Dalian iron ore +1.2% to 525.5 yuan

LME aluminium +0.1% to $US2211 a tonne

LME copper +1.8% to $US7169 a tonne

10-year bond yield: US 2.83%, Germany 0.73%, Australia 2.93%

From Today's Financial Review

Why the RBA will hike interest rates: Get set for Australian interest rates to start moving higher in the second half of this year.

Australian banks add to global systemic risks: Banks in four economies, including Australia, have expanded to a size that should concern all global investors, a leading market consultancy has warned.

Tax Office probes $80b in revaluations: The Tax Office is investigating 27 multinationals over $78 billion in potentially dodgy revaluations used to get around anti-tax avoidance rules.

United States

The S&P 500 Index and Dow Jones Industrial Average each declined Monday, weighed down by energy, health-care and financial stocks.

"You're going to have these blowoffs that are going to be a little more common than they were last year," Tom Plumb, president of Madison, Wisconsin-based SVA Plumb Wealth Management, said by phone. The firm manages $US2.7 billion. "And I still think they'll be looked at as opportunities to step in."

Equity investors are looking for confirmation that recent declines represent the healthy correction many had expected after the stellar start to the year. The downward move was sparked by U.S. wage data on Friday that pointed to quickening inflation, which would lead to higher rates and, in turn, rising borrowing costs for companies.

"Clearly, we are concerned about any setbacks on the stock market," White House spokeswoman Mercedes Schlapp said on Fox Business News. "At the same time, we do believe the economic fundamentals are strong. You understand how the stock market works, it has cycles and trends. We are still in a bull market."

LPL on the return of volatility: "The S&P 500 fell 3.8 per cent for the week, for the worst weekly decline since early 2016. Volatility continues to rule so far in 2018, as the S&P 500 has now gained or lost at least 2 per cent for the week 3 of the 5 weeks so far this year. To put this into perspective, not a single week last year changed 2 per cent up or down. The 2.1 per cent drop on Friday was the single largest drop for the S&P 500 since September 9, 2016 when it fell 2.5 per cent."

US services sector activity raced to a near 12-1/2-year high in January, buoyed by robust growth in new orders, the latest sign of strong momentum in the economy at the start of the year. The ISM said its non-manufacturing activity index jumped 3.9 points to 59.9, the highest reading since August 2005.

Europe

European stocks suffered a sharp sell-off on Monday as growing inflation expectations and rising bond yields took their toll on equity markets.

Europe's STOXX 600 fell 1.6 per cent to close at its lowest level since mid-November 2017. It was its sixth straight day of declines for the STOXX, while euro zone stocks fell 0.6 per cent.

Among major European equity markets, only Spain and Italy are still higher than at the turn of the year, with Britain the worst performer. German bond yields hit a two-year high as fears of inflation drove a sustained sell-off in bond markets.

"Many sentiment and technical indicators were suggesting the market was overbought in late January, so part of this sell-off can be attributed more to technical than fundamental factors," said Edward Park, investment director at Brooks Macdonald.

All sectors were in the red on Monday, but the rise in bond yields particularly hit sectors with high-dividend paying stocks known as 'bond proxies'. Europe's personal and household goods index and telecoms both fell more than 2 per cent.

Company earnings provided little solace to investors.

Ryanair fell 2.7 per cent after the airline struck a cautious tone about fares and potential disruption from pilot unions, though it reported rising profits.

Overall Europe has so far seen more earnings misses than beats for the first time since the fourth quarter of 2014, Morgan Stanley analysts said.

While the earnings season was still in its early days, Morgan Stanley also found post-results price performance showed a clear negative skew, indicating investors are quick to punish companies for missing earnings and sales expectations.

Analysts began revising earnings down last week, I/B/E/S data showed, as the equities sell-off deepened.

Asia

Chinese shares bucked the region's tumble on Monday. Cross-border money flows to Hong Kong from Shanghai via the Connect pipeline hit their highest in nearly three years, in a flurry of bargain hunting by Chinese investors.

Mainland investors also piled into battered big-caps listed in Shanghai, reversing losses in the main indexes, as they shunned small-caps increasingly plagued by margin calls, huge earnings losses and a deepening liquidity crunch due to the government's clampdown on shadow banking.

The Shanghai Composite index, which opened 1.5 per cent lower, ended the session up 0.7 per cent at 3487.38, while the blue-chip CSI300 Index also reversed losses, closing up 0.1 per cent.

Highlighting diverging fortunes, the SSE 50 Index, which tracks China's 50 biggest stocks, rose 1 per cent, while the start-up board ChiNext fell 0.8 per cent.

In Hong Kong, the Hang Seng Index recovered sharply at the close, down just 1.1 per cent, aided by a flood of Chinese money after opening 2.7 per cent lower, knocked down by the turmoil on Wall Street amid inflation fears.

The reversal of fortune was more notable in an index tracking Hong Kong-listed Chinese firms. The Hong Kong China Enterprise Index tumbled 3 per cent at open, but ended the session merely 0.4 per cent lower.

Japan's Nikkei share average fell sharply on Monday. The Nikkei tumbled 2.5 per cent to 22,682.08, its biggest one-day drop since November 9, 2016.

It was also the lowest close in more than seven weeks and fell below its 50-day moving average for the first time since September.

The Nikkei volatility index jumped to 20.45, its highest close in three months.

The broader Topix slumped 2.2 per cent to 1823.74, giving up almost all of its gains so far this year, with small-cap shares hit the hardest with Topix Small falling 2.5 per cent.

Currencies

Yields on core government bonds in Europe fell, as did those of 10-year Treasuries. The pound slumped, and the euro declined. The Bloomberg Dollar Spot Index gained 0.2 per cent.

European Central Bank President Mario Draghi said the euro zone economy has strengthened enough to lift regional inflation towards the ECB's 2-per cent goal.

Commodities

Copper hit a three-week high on Monday as the US dollar rally paused and the balance of supply and demand looked to stay relatively tight, while nickel climbed after posting its largest daily loss in two months on Friday.

London Metal Exchange copper closed up 1.8 per cent at $US7169 a tonne, having hit its highest since mid-January at $US7220, while nickel ended up 2.4 per cent at $US13,745 a tonne, having plunged 4 per cent on Friday.

Russian aluminium maker Rusal estimates that China's winter capacity cuts will curb output by 1 million tonnes annually. Aluminium ended up 0.1 per cent at $US2211.

Rio's Mongolian own goal: Rio Tinto keeps getting hit with problems around its giant Mongolian copper mine. But some issues can be much better dealt with.

China has officially approved the participation of overseas investors in the trade in iron ore futures on the Dalian Commodity Exchange (DCE), making it the first commodity contract to be internationalised by the country, Metal Bulletin reported.

Archer-Daniels-Midland is in advanced talks to acquire commodity trader Bunge, accelerating the pace of consolidation in the global grain-trading industry, according to people familiar with the matter. ADM and Bunge, which has a market value of about $US11.5 billion, could reach an agreement as early as this week, the people said. ADM is scheduled to announce full-year earnings tomorrow.

Australian Sharemarket

Dividends the only friend of investors in 2018

Australian shares have had their worst day in seven months after the global bond market's sell-off hit the ASX, leading some investors to speculate that the bull run in global equities has been shattered.

Monday's 95 point fall, a drop of 1.55 per cent, to 6026 points follows a savage session on Wall Street on Friday, triggered by a sell-off in the bond market on evidence that US wage growth is picking up.

It was the worst day for Australian shares since June 2017. Futures indicate the S&P 500 is headed for a slight fall at Monday night's open. In Asia, Japan's Nikkei 225 was down 2.55 per cent and Hong Kong's Hang Seng lost 1.2 per cent.

"We don't know if it's the top yet, but I view it as the natural end game of an enormous liquidity injection over the last 10 years, something like this was always going to happen given the amount of money that's been pushed into the system," said Chris Daily, chief investment officer at Tribeca Investment Partners.