ASX poised to extend losses, Wall St mixed

Shares in New York were mixed at midday, as tech shares mostly rebounded. ASX futures were pointing to more losses. The Australian dollar surged back above the US71¢ mark.

The dust was starting to settle after heavy losses across Asia and less furious losses across Europe. US equities were recovering, somewhat, from the shock of the sharp plunge the previous session.

A range of comments from market watchers, from bears to bulls:

Capital Economics: "The 4% drop in the S&P 500 so far this week suggests that investors are starting to factor in the prospect of the US economy slowing in response to tighter monetary policy. We think that this will start to happen in 2019, causing equities in the US and elsewhere to fall much further, as well as forcing the Fed to stop hiking rates and pushing Treasury yields down."

While Capital Economics sees investors adjusting to the prospect that higher US rates will dent economic growth, the latest economic data is still "very strong" and "it is certainly possible that the recent drop in the stock market reverses over the next few days or weeks. That is, after all, what happened back in February of this year when the S&P 500 plunged by 10% in the wake of another sharp rise in Treasury yields".

Still, Capital Economics said "we think that a slowdown in the US economy is no more than a few quarters away, and ultimately expect Treasury yields and the S&P 500 to end next year much lower. While we are not anticipating anything as dramatic as the global financial crisis, we do think that economic growth will clearly have fallen significantly by mid-2019. Our forecasts are therefore for the S&P 500 to drop by a total of about 15% from its recent peak".

LPL Financial: "Stocks suffered their biggest one-day decline since February, as a combination of higher bond yields, US/China tensions, nervousness over the upcoming midterm elections, six straight months of gains, and worries about peak margins this earnings season all added up to a big sell-off ... The S&P 500 Index had gone 74 consecutive days without a 1% move-the 10th longest streak in history. In other words, equity markets were wound tight and some type of volatility was likely.

"October is known for spectacular crashes (1929, 1987, and 2008), but in reality it's about average in terms of returns. What it really should be known for is volatility. Incredibly, no month has seen more 1% changes (up or down) than the month of October for the S&P 500 going back to 1950.

LPL retains its bullish optimism: "Pullbacks are normal. Even though stocks tend to average a 7-8% gain each year, they also tend to have three to four pullbacks each year (5-10% drops) and at least one 10-20% correction. We got both earlier this year but history tells us we may get more. Still, we see the potential for a year-end rally."

Yardeni Research: "Our Bull/Bear Ratio (BBR) slipped to 3.04 this week, after climbing eight of the prior nine weeks from 2.90 to 3.32—which was its highest reading since mid-March. Bullish sentiment fell to 56.3% after rising 7.3ppts (to 61.8% from 54.5%) the prior nine weeks, while the correction count increased to 25.2% after falling -7.1ppts (19.6 from 26.7) the previous nine weeks. A week ago, the former was at its highest reading since the end of January, while the latter was at its lowest since mid-February 2012. Meanwhile, bearish sentiment was once again little changed, ticking down to 18.5% this week; it has fluctuated in a narrow band between 17.6% and 18.8% since early June. The AAII Ratio advanced for the third week to 64.5% last week after sliding from 64.0% to 49.4% the prior two weeks. Bullish sentiment rose for the second week to 45.7% last week after falling the prior three weeks from 43.5% to 32.0%, while bearish sentiment fell for the third week to 25.1%, following a two-week rise from 24.4% to 32.8%."

Today's Agenda

Local data: BusinessNZ manufacturing PMI September

Overseas data: China trade balance September; Euro zone industrial production August; US import & export prices September, University of Michigan consumer sentiment

Market Highlights

SPI futures down 53 points or 0.9% to 5772 at 3.20am AEDT

AUD +0.9% to 71.20 US cents

On Wall St at 12.20pm: Dow -0.2% S&P 500 -0.7% Nasdaq +0.4%

In New York, BHP +0.6% Rio +0.4% Atlassian +1.1%

In Europe: Stoxx 50 -1.8% FTSE -1.9% CAC -1.9% DAX -1.5%

Spot gold +2.1% to $US1219.78 an ounce at 12.08pm New York

Brent crude -2.3% to $US81.20 a barrel

US oil -2.2% to $US71.58 a barrel

Iron ore +0.2% to $US71.30 a tonne

Dalian iron ore +0.4% to 514 yuan

2-year yield: US 2.85% Australia 2.02%

5-year yield: US 3.01% Australia 2.22%

10-year yield: US 3.16% Australia 2.73% Germany 0.52%

US-Australia 10-year yield gap at 3.15am AEDT: 43 basis points

From Today's Financial Review

Rich Listers lose $382m in ASX wipeout: Three Rich Listers holding big stakes in the market's 10 worst performing stocks nursed big losses on Thursday.

Chanticleer: Running a bank no longer about banking: As markets tumbled, Brian Hartzer and Matt Comyn were in Canberra, proving that running a bank is a different proposition in the current environment.

Hayne overreach could hurt economy: Overloading regulation on banks sector in the wake of the Hayne inquiry could exacerbate the housing downturn, Brian Hartzer has told MPs.

United States

LPL on the latest US price data: "Inflation data out this morning is helping to ease the selling pressure on stocks as the Consumer Price Index came in weaker than expected."

The Consumer Price Index increased 0.1 per cent last month after rising 0.2 per cent in August, the Labor Department said. In the 12 months through September, the CPI increased 2.3 per cent, slowing from August's 2.7 per cent advance.

Excluding the volatile food and energy components, the CPI edged up 0.1 per cent for the second straight month. The so-called core index had increased 0.2 per cent in May, June and July.

In the 12 months through September, the core CPI increased 2.2 per cent. Economists polled by Reuters had forecast both overall and core CPI climbing 0.2 per cent in September.

Europe

UK shares closed at their lowest since April as a global sell-off on equity markets caused by fears of fast-rising rates showed no sign of ending on Thursday despite data showing slower than expected US inflation.

The FTSE 100 ended the day down 1.9 per cent, a fall broadly in line with European benchmarks, all retreating as the S&P 500 and the Nasdaq were set for a second session of heavy losses after their Wednesday plunge.

"The bloodbath for global equities comes as investors adjust to a world of higher US interest rates", said Jasper Lawler from London Capital Group, explaining that investors were switching bets on so-called growth stocks, like America's Facebook or Amazon to "more conservative strategies".

A smaller-than-expected rise in consumer prices in the United States seemed to weaken the case for an aggressive campaign of interest rate rises but did little to reassure investors on either side of the Atlantic.

Adverse corporate news meant that British firms were among the biggest losers across Europe.

Books, newspaper and stationery retailer WH Smith posted the worst performance of the pan-European STOXX 600 index, slumping 11.5 per cent. It unveiled plans to restructure its high street business to face lower consumer spending and lingering economic uncertainties.

Third-quarter company earnings in Europe are expected to have increased 14 per cent year-on-year, against the 21.4 per cent growth expected for the S&P 500, according to IBES Refinitiv.

European equity valuations have sunk to extreme levels. The discount to US stocks is nearing 20 per cent - a gap last seen during the 2009-2012 sovereign debt crisis which prompted hefty monetary policy easing in the euro zone.

Asia

China stocks down 5pc, touch four-year lows: Heavy losses this week have revived the spectre of market turbulence three years ago that triggered concerns about the stability of China's economy.

Japan's Nikkei tumbled to a one-month low on Thursday and suffered its biggest daily decline since March, hit by a sell-off in global shares, while tech firms and industrial equipment makers underperformed.

The Nikkei share average ended 3.9 per cent lower at 22,590.86, the weakest closing level since September 10.

The benchmark index has fallen around 8 per cent from a 27-year high of 24,448.07 hit last week.

Analysts said that the Japanese market, which was showing signs of overheating, was prone to profit-taking but after a correction is done, the market should be supported by solid fundamentals.

"Companies will start reporting their July-September earnings soon, and strong results should support the downside of the market," said Masahiro Fukuda, investment director at Fidelity Investments in Japan.

"Rising yields are not good for stocks for sure, but we will likely see a recovery in companies' EPS, which is expected to offset the negative impact from high yields."

While all of the Topix's 33 subsectors were in the red, China-related stocks underperformed others.

SoftBank Corp, which has stakes in global tech companies such as Alibaba, dropped 5.8 per cent, reflecting weakness in global tech stocks.

Currencies

President Donald Trump launched a second day of criticism against the Federal Reserve on Thursday, calling its interest rate increases a "ridiculous" policy that was making it more expensive for his administration to finance its escalating deficits.

"I'm paying interest at a high rate because of our Fed. And I'd like our Fed not to be so aggressive because I think they're making a big mistake," Trump said in a Thursday morning interview on Fox & Friends.

It was also quickly qualified by National Economic Council Director Larry Kudlow, who said the Fed was "on target" in policies that were responding to a strong economy.

The rise in interest rates is "a sign of economic health, that is something to be welcome and not feared," Kudlow said on CNBC. "The president is not dictating policy to the Fed...They are independent. They are going to do what they are going to do."

Commodities

China's construction steel futures recovered from the steep declines seen across international commodity and equity markets to close higher on Thursday, as possible Chinese production curbs ahead of winter remained in focus.

Shanghai benchmark construction steel futures initially fared little better, falling as much as 2.1 per cent to 3958 yuan ($US571.12) a tonne early in the session, before closing up 0.3 per cent at 4056 yuan a tonne.

Hot-rolled coil futures plunged 3 per cent to 3831 yuan, but rallied to close down 1 per cent at 3909 yuan a tonne.

Markets are still paying close attention to regional plans for winter cuts to industrial output, part of the government's years-long battle against pollution.

The Yangtze River Delta region in the country's east, which includes key manufacturing hubs, is working on a new integrated winter pollution plan similar to one in northern areas, said officials at two local environment bureaus.

"Supply is expected to reduce as more regions publish their anti-pollution action plans," analysts at Huatai Futures said in a note.

Shanxi province, a major coal mining hub, this week vowed to cut coking capacity and annual coke output as part of its campaign against smog.

Dalian's most-traded coke contract, for January delivery , closed up 0.4 per cent at 2455 yuan a tonne, while coking coal futures ended 0.9 per cent higher at 1366.50 yuan a tonne.