Markets Live: ASX plunges 2.8pc

Here's Peter Wilmshurst, Portfolio Manager at Templeton Global Growth Fund, on the markets:

To put events of last few days into perspective, for the year to date the S&P 500 is now down 1 per cent. but when compared to the highs of January has clearly come off.

In 2017 we saw improved economic and earnings growth, across the world, but we didn't see any particularly problematic signs of inflation. There has been some strength in commodity prices, but other than that inflation has remained subdued.

The US Fed has continued to raise rates and in 2018 we are going to approach the end of the period when central banks expand their balance sheets. European Central Bank (ECB) net buying is likely to be complete by the end of this year. And the US Fed is running down their balance sheet slowly.

In our view, overall, we've got a better fundamental economic and earnings picture which should be supportive of international equities, boosted by US Fiscal policy including tax cuts. Of course, we are going to have to pay a higher price for those better fundamentals.

Here's Citi on bonds, inflation and equity markets:

The argument for growing wage pressures has been in place for months. We have shown clearly that the gap between the U6 and U3 measures for joblessness has been a crucial feature on wage trends for the past 15+ years and not the alleged innovative technological disruption, as is often suggested.

Moreover, the gap is expected to shrink even more in the months ahead with compensation repercussions. Accordingly, one should expect Treasury yields to continue rising.

The investment community's complacency also provided a vulnerable backdrop. Euphoria readings historically had been associated with elevated P/E multiples and stock market risk, but all was being excused via contentions of better earnings growth and synchronised global economic expansion.

Indeed, record upward earnings revisions were seen as equities-supportive but not unsustainably high. Arguably, last week's price action may bring more balance to the debate.

Higher 10-year yields help certain industry groups (typically in the value camp) while a pickup in inflation expectations implies a cyclicals bias.

A rotation within the S&P 500 may prove more probable than a wholesale further decline, though 5 per cent pullbacks are quite normal even if fund managers haven't seen them that often of late.

The ASX is dropping more points as the session gets going, with the benchmark now down 170 points, or 2.8 per cent, to 5856, a level last seen in mid-October.

It's the worst day for the index for more than 18 months. The last time the ASX sold off to this extent was on June 24 2016 when it shed 167 points. Before that, it dropped 195 points on 29 September 2015.

Investors were reacting to heavy selling on Wall Street overnight, where traders saw a return to marked volatility for the first time since President Trump was elected in November 2016.

Selling was broad-based in the ASX, with all 200 stocks trading lower.

The ASX fell 156 points, or 2.6 per cent, at 5870 as investors reacted to an overnight plunge on Wall Street.

The All Ordinaries fell 162 points, or 2.6 per cent, to 5966 and the Australian dollar traded at US78.80¢.

It's the worst drop for the ASX in points terms since the index plunged 167 points on June 24, 2016.

Stocks on Wall Street plunged on Monday trading as investors panicked about the US interest rate outlook and the Dow Jones Industrial Average lost more than 6 per cent at one point during late afternoon trade.

The fear selling accelerated around 3pm New York time, before markets snapped back to recoup some of the losses to leave the Dow down 4.6 per cent at the close.

The broad S&P 500 shed 4.1 per cent, its worst percentage loss since August 2011. The tech-heavy Nasdaq Composite lost 3.8 per cent by the close.

Banks were the worst performers by sector, with CBA dropping 2 per cent and Westpac giving up 2.6 per cent.

Miners were also on the backfoot, with BHP down 2.6 per cent and PIlbara Minerals dropping 9.3 per cent.

Macquarie shares were down 4.2 per cent. The banking group ratcheted up full year guidance.

So far, the American market sell-off is more like a correction than a bear market, says Shane Oliver at AMP Capital.

"Rising rates and rising inflation and rising bond yields are causing a bit of turmoil in equity markets," he said.

Stocks on Wall Street plunged on Monday as the Dow collapsed below 25,000 points and erased as much as 1597 points at the height of the meltdown, to record the largest intraday point decline in its history.

"For so long markets have been used to low interest rates and low bond yields. Now we've seen the US economy turn up and the market is adjusting," said Mr Oliver.

"I do think we will find a low as earnings come through and with the low likelihood of a recession," he said.

However, volatility is likely to rise from last year's unusually low levels, he said.

"In some ways it's back to normal - last year was a bit unusual. We haven't seen anything like this since before Mr Trump as elected as president and since Britain voted to exit the European Union," he said .

Australia won't escape the US sell off on Monday, he noted.

"We're going to come off again today. LIke the US, there's probably more downside," Mr Oliver added.

The RBA is set to hold an interest rate meeting today and trade and retail sales figures are due. The Australian dollar is at US78.83¢/.

"The trade, retail sales, and the RBA are today's big trigger points for Australian dollar traders. There is very little chance of a change in rates and governor Lowe is likely to exhibit caution given wages and inflation," said Greg McKenna, chief market strategist at AxiTrader.

"How the governor frames what's likely to be an upbeat take on domestic and global growth with wages and inflation levels is going to be key to the impact on rate expectations and thus the Aussie dollar. Before that, though the data is likely to buffet the market," he added.

Retail sales in December are expected to dip 0.2 per cent after November's iPhone induced a surge of 1.2 per cent while trade is forecast to deliver a $250 million surplus after last month's surprise deficit, Mr McKenna noted.

Hamish Douglass's international funds management group Magellan will buy John Sevior's Airle Funds Management and US fund manager Frontier Partners Group in deals worth around $140 million.

Magellan, which announced a 33 per cent fall in interim profit to $65.7 million on Tuesday, said the deals would "strengthen its retail funds management business in Australia and add significant focus to its institutional distribution activities in North America".

Airle was founded by former Perpetual share picker John Sevior and David Cooper in 2012, with fellow Perpetual star Matt Williams joining in 2016.

James Thomson reports

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Here's IG's Chris Weston on the markets;

More woe on Wall Street has the local sharemarket set up for another heavy day of losses.

The S&P 500 has tailed on from another weak European trading session, with the Dow erasing all its 2018 gains and all indexes sharply lower. The bid has dried up here and the sellers are having a far better time of it.

We can talk about weakness in crude being so important, but we also have implied and realised S&P 500 volatility headed higher, with the VIX index pushing to 18.6%.

This has likely brought a fresh wave of selling from funds who use volatility to assess how much exposure they have to equities and credit. Right now we are seeing these players, as well as funds who have sold volatility to enhance yield, getting out of the market in droves – volatility is key.

Clearly, there is still much time before the open of equity markets in Asia, but this is not a market to buy with any conviction and if anything the price action and poor tape in global equities is enough to raise cash levels in portfolios.

As mentioned in reports early last week, hedge because you can and its cheap, not because of you are forced to and right now traders and investors are being forced to hedge and actively manage drawdown and it's expensive. That said, I am happy to be shocked but this seems a low probability given Japan and Hong Kong look likely to struggle.

Macquarie Group has racheted up its 2018 earnings guidance, noting profit would be up about 10 per cent on the previous year's record.

Conditions in the three months ended December 31 "were satisfactory," Macquarie - which has a March 31 balance date - said in an ASX statement on Tuesday. That came ahead of the Sydney-based company's annual operational briefing that will provide insights into Macquarie's view on infrastructure, energy and technology.

Macquarie's prior earnings guidance pointed to 2018 results that would be "slightly up" on last year's record result of $2.2 billion.

The company is benefiting from a stronger deal environment and a colder winter in the northern hemisphere.

Chief executive Nicholas Moore will address analysts and fund managers at the briefing on Tuesday morning.

Joyce Moullakis reports

The overnight drop in the US markets was "pretty amazing" said Matthew Sherwood at Perpetual Investments.

"In the last few weeks investors have been given a potent reminder of the power of the bond market," he said.

The plunge in the US stockmarket on Monday was likely due to algorithms kicking in and "everyone screaming for parachutes at the same time" he said.

Still, the moves in the US markets should serve as a reminder to investors of what can happen when a decade of central bank stimulus is withdrawn and highlight the need to find sources of diversification such as safe-haven currencies, Mr Sherwood said.

Here's a bit more detail on that overnight market sell off in the US:

The S&P 500 Index and Dow Jones Industrial Average each were hammered on 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 US 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.

Read the full premarket report from TImothy Moore

All the overnight market action in numbers:

SPI futures down 139 points or 2.3% to 5822
AUD -0.5% to 78.82 US cents
On Wall St: Dow -4.6%, S&P 500 -4.1%, Nasdaq -3.8%
In New York, BHP -2.8%, Rio -1.9%
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 2.70%, Germany 0.73%, Australia 2.93%

On the economic agenda today:

Local data: Trade balance December, Retail sales December, RBA cash rate decision
Overseas data: German factory orders December; US Trade balance December

Stocks to watch:

NextDC Downgraded to Hold at Canaccord
Pact Group Upgraded to Buy at Morningstar
Sandfire Downgraded to Neutral at Hartleys
SWM AU: Seven West Upgraded to Buy at Morningstar

ASX futures are down 139 points, or 2.3 per cent, foreshadowing a sharp drop when markets open at 10am. The Australian dollar traded at US78.82¢.

Any drop would come hard on the heels of the ASX's worst one-day performance in seven months on Monday, when US inflation fears roiled global markets.

Fresh losses for the ASX would follow a day of heavy selling in the US when the Dow fell 4.6 per cent. the broad S&P 500 shed 4.1 per cent and the tech-heavy Nasdaq Composite lost 3.8 per cent by the close.

Traders blamed the calling in of margin loans and automated computers for exacerbating the abrupt selling and the market shedding more than 1600 points at the lows of the day.

John Kehoe reports

Good morning and welcome to the Markets Live blog for Tuesday.

Your editor today is Sarah Turner.

This blog is not intended as investment advice.

Fairfax Media with wires.

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