Wall St fluctuates, ASX futures higher

by Timothy Moore

The Dow fell, then rose, repeatedly through morning trade in New York as the dust appeared to settle. ASX futures were higher. The Australian dollar was flat by midday in New York (4am AEDT).

It wasn't looking good ahead of the opening bell in New York and Wall Street's three major benchmarks didn't disappoint, dropping sharply in the first five minutes of trading. The Dow initially shed more than 560 points. Then it turned. Within 15 minutes of the open, the Dow had turned slightly positive - leaping more than 360 points. A near 1000 point move in the first 20 minutes of the session.

The fluctuations were mirrored in the S&P 500 and the Nasdaq. In addition, the VIX spiked before retreating - its day range 22 to 50. It recently was down 10 per cent at 33.

Here's what some strategists are saying:

Volatility returns to the Dow. Bloomberg

"Going back three decades, the average market drop in any given year has typically been around 10 per cent. What Americans are witnessing now is thus a return to normal market behaviour, which has never followed a straight line," said Ruchir Sharma, chief global strategist at Morgan Stanley Investment Management in an opinion comment in the New York Times. "2018 may be remembered as the year when the moody market beast returned to its natural state."

OANDA senior market strategist Craig Erlam: "We've become so accustomed to dips being bought over the last couple of years that this appears to have caught people off-guard and that's generated some of the panic responses that we've seen.

Now that the dust appears to be settling, people seem to be reflecting on this as a reminder that market corrections are perfectly normal and not always a sign that something is about to go terribly wrong. The rally over the last couple of years has been very strong and without any corrections of note and it's possible that this has led to some complacency in the markets, with investors perhaps getting a little ahead of themselves.

Of course we'll have to wait and see over the next couple of days if the sell-off generates and further fear-driven selling but I'm not currently convinced it would be warranted. The economic fundamentals appear fine and the environment has been gradually improving over the last couple of years. This has led to higher interest rate expectations and it's possible that these have gone a little too far."

Think Markets' Naeem Aslam: "We all know one thing which is, that markets usually grind to the upside but fall like a rock."

Volatility returns to Volatility: the VIX. Bloomberg

Aslam: "The sell-off in the market is nothing more than just long overdue market correction. As there is no fundamental situation which has made matters worse. The earnings season has told us one story that corporate profits are strong and the consumer confidence shows that investors are comfortable with their spending. Under these conditions, the only thing which can be blamed for the kind of sell-off which we experienced yesterday is a machine- AKA high-frequency trading. Aglos triggered once again! The regulators need to address this issue because a drop like this is worse than anything on the street, we are talking about real companies with revenue streams.

"Another reason why we think that this is a healthy correction is that we are not seeing any panic buying for safe haven-gold. Usually, investors would park their funds in gold and the price of gold would reflect that. But, under the current circumstances, we aren't seeing hot honey (yes I mean honey) isn't flowing into gold. Because under a real panic situation, we would have seen more than $US40 move in a single day for the gold price."

Spot gold, according to Bloomberg pricing, was $US10.40 or 0.8 per cent lower, at $US1329.27 an ounce at 12.24pm in New York.

Tematica chief investment officer Chris Versace: "We are seeing what we and many others have been calling for – a removal of the froth in the stock market that will pull stocks down from nosebleed levels, offering upside to be had for well-positioned companies in return.

"As we look at the economic data, we do not see a recession imminent, but rather a firming economy that should offer solid footing to a more sanely priced stock market as investors come to grips with the current and near-term market dynamics."

Today's Agenda

Local data: AiG performance of construction January: NZ unemployment rate fourth quarter, employment change fourth quarter

Overseas data: German industrial production December; US consumer credit December

Market Highlights

SPI futures up 32 points or 0.6% to 5796

AUD flat at 78.78 US cents

On Wall St: Dow +0.3%, S&P 500 -0.3%, Nasdaq +0.2%

In Europe: Stoxx 50 -2.4%, FTSE -2.6%, CAC -2.4%, DAX -2.3%

Spot gold -0.8%

Brent crude -0.9%

US oil -0.3%

Iron ore +0.3% to $US75.92 a tonne

Dalian iron ore +0.1% to 522.5 yuan

10-year bond yield: US 2.75%, Germany 0.69%, Australia 2.82%

From Today's Financial Review

Macquarie's Moore takes rout in his stride: Macquarie Group CEO Nicholas Moore has shrugged off concerns about a sharp market correction and any threat posed by rising global interest rates.

Don't blame ETFs for market correction, says BlackRock: The fall in global stock markets is not being exacerbated by exchange traded funds, says BlackRock's head of global strategy.

Why defensive stocks may not save you: If you thought you'd find shelter from volatile markets, rising interest rates may have undermined your "insurance policy".

Five things SMSFs need to watch in the correction: The 4.1 per cent fall in the S&P 500 on night needs to be put in perspective, says Anton Tagliaferro. "The correction is overdue."

United States

US stocks fell in volatile trading on Tuesday, as a pullback from record highs steepened following the biggest one-day declines for the S&P 500 and Dow in more than six years. At its lowest point shortly after the opening bell on Tuesday, the Dow was off 10.7 per cent from its all-time record high set on January 26.

Major indexes swung up and down after starting the session 2 per cent lower, underscoring a return of volatility to a market that until recently had been known for the absence of such major shifts.

The sharp declines in recent days marked a pullback long-awaited by investors after the market minted record high after record high in a relatively calm ascent.

"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 Florham Park, 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."

Fundstrat: "We continue to view the cycle backdrop as positive given longer-term uptrends for most equity markets remain positive and given the bullish cycle roadmap outlined in our 2018 Outlook. We view the current markets weakness as a pullback within a bull market and do not see the type of divergences in breadth, leadership or credit that normally precede/accompany a major cycle peak."

Yardeni Research: "The stock market may or may not have an overvaluation problem. That depends on whether historically low inflation and interest rates justify today's historically high P/Es ... Of course, if both inflation and interest rates are headed significantly higher, then the recent swoon in stock prices may continue to recalibrate valuation levels lower. In any event, the stock market certainly doesn't have an earnings problem. The cut in the corporate income tax has been a big booster for 2018 earnings expectations."

Europe

The STOXX 600 index closed down 2.3 per cent, paring earlier losses, with confidence in the region's economic recovery partly offsetting concerns about the rising volatility. Still the drop was the 600's biggest one-day loss since the Brexit vote in June 2016.

"Price action is clearly driven by technical factors, tied to a brutal awakening of stock volatility," said Alessandro Balsotti, head of asset management at JCI Capital Ltd. "Ultimately I think the robust economic phase will be able to withstand the bloodshed on volatility," he added.

Europe's volatility gauge just posted its biggest daily jump ever, up 60 per cent on the day, as volatility across stock markets surged from historic lows and retail products shorting the VIX were wiped out.

The cost of buying options on volatility has hit an all-time high, according to UBS Wealth Management, as investors rush to buy protection against further slides. But investors were already talking about buying the dip, saying this long-awaited correction was healthy, and traders welcomed the spike in volumes. The STOXX 50 saw nearly three times the average daily volume traded.

"Phones were very active first thing, then it's just been calm and utter amazement," says a trader. "Volumes higher, yes, and definitely some dip buyers, but I still think we go lower."

"There is weakness across various equity sectors, but none so large the market is likely to fall through them. My money remains on equities - but rotating (and buying on weakness) into value areas of the market that have lagged in the recent momentum-driven rally," said James Bateman, CIO, Multi Asset, Fidelity International.

Asia

The benchmark Hang Seng Index plummeted 5.1 per cent, its biggest daily percentage drop since August 2015. Hong Kong is particularly exposed to US rate moves because its currency is pegged to the US dollar.

The HSCE, an index tracking Hong Kong-listed Chinese firms, tumbled 5.9 per cent, its biggest single-day drop since July 2015.

The market was little helped by a second-day of heavy bargain-hunting from Chinese investors, who on Tuesday spent more than 8 billion yuan buying Hong Kong stocks via the Stock Connect linking the mainland and Hong Kong.

Stocks fell across the board. China's biggest lenders and insurers such as ICBC, Bank of China, China Life and Ping An slumping around 6 per cent.

Tencent Holdings and Cnooc are among 11 companies that will join the Hang Seng China Enterprises Index, while China Railway Construction will be removed, Hang Seng Indexes said in its quarterly review. The changes will take effect on March 5 and increase the number of constituents on the gauge to 50 from 40, the index compiler said in a statement.

Japanese stocks suffered their biggest point drop since June 2016 on Tuesday. The Nikkei 225 share average ended down 4.7 per cent at 21,610.24, marking the biggest percentage fall in 15 months and falling to its lowest close since October 20. In terms of index points, it was the biggest decline since June 2016.

The Nikkei Volatility Index jumped 52 per cent to 31.02, after rising as high as 35.34 earlier, the highest point since June 2016.

The broader Topix dropped 4.4 per cent to 1743.41, with 3.16 billion shares changing hands, the largest volume since November 2016. Turnover jumped to 5.6 trillion yen, the highest since May 2013.

Currencies

TM's Naeem Aslam on cyrptocurrencies: "If there is anything which is selling at a massive discount, it has got to be your cryptocurrencies. Bitcoin is down nearly -69.29%, that is some discount- but that is if Bitcoin going to return to it's all-time high. We have broken the $US6000 mark, the low of the day is 5992 and this indicates that we are very close to the bottom. It is certainly possible that we could drop still a little more, but we do think that the current sell-off is heavily oversold by any measure. One may want to pay less attention to adverse headlines and look at the price curve more closely. Why? You need to think who is abandoning the ship and who is coming on board or filling their tanks."

Commodities

Elliott's BHP assault renewed and rearmed: The US activist claims BHP could release $US22 billion by collapsing the global giant's apparently clumsy dual listing structure. But it remains a long shot.

Iron ore shipments to China in January from Australia's Port Hedland terminal fell 11.3 per cent from a month ago to 34.7 million tonnes, their lowest since July, port data released on Tuesday showed. That compares with 39.1 million tonnes in December. January imports were 0.6 per cent higher than a year ago, the data showed.

Australian Sharemarket

Australian shares slumped to their worst session since September 2015 on Tuesday, with the move wiping $56 billion off the value of the stock market, as investors took fright at the prospect of interest rate hikes to counter rapidly rising inflation.

"Rising rates and rising inflation and rising bond yields are causing a bit of turmoil in equity markets," said Shane Oliver, head of investments at AMP Capital.

The S&P/ASX 200 index dropped 192 points, or 3.2 per cent, to 5833 for its worst one-day point fall since September 29, 2015 when it dropped 195 points.

The broader All Ordinaries index slumped 198 points, or 3.2 per cent, to 5930 and the Australian dollar traded at US78.54c after the Reserve Bank of Australia kept interest rates on hold at 1.5 per cent as widely expected.