ASX poised to rally as Wall St recoups losses

Australian shares are poised to rally to end a dismal week, as 'buy the dip' proves the strategy still has some room to run yet. ASX futures up 73 points or 1.3 per cent at 7.15am AEDT. The Australian dollar edged 0.3 per cent higher.

"It's natural to see an increase in market volatility" at this stage of the cycle and investors need to get used to it as it could extend for some time yet, NAB's Rodrigo Catril said in a morning podcast.

Wall Street bounced with all three benchmarks sharply higher at the close - the Nasdaq leapt more than 3 per cent - as investors embraced techs again. Microsoft's strong quarterly results help quell yesterday's panic attack. The Dow was up 1.6 per cent.

After today's closing bell in New York, Amazon and Alphabet are set to report results. Intel too.

The VIX retreated 8.6 per cent to 23.06 at 4.01pm New York time.

The yield on the US 10-year Treasury note was 32 basis points higher at 3.12 per cent at 4.19pm in New York, widening the gap with its Australian counterpart to 51 basis points. The Australian 10-year note yesterday settled at 2.61 per cent.

"October is known for volatility, and we've sure seen it so far," LPL senior market strategist Ryan Detrick said in a post. "In fact, by many measures, October is poised to be one of the worst months in years. The S&P 500 Index has had two separate six-day losing streaks this month for the first time in history. That pretty much sums it up."

Mr Detrick said there has been reason for investor angst: "Six days out of 18 (33%) have closed at least 1% higher or lower for the first time since 1963, which comes on the heels of not a single 1% change during the entire third quarter of 2018."

In addition, Mr Detrick said the S&P 500 has been down 14 days so far in October, the most for any month since May 2012. "Also, 78% of the days this month have closed in the red (14 of 18), the worst for any month since 82% of days in April 1970 closed down."

Ever the optimist, Mr Detrick also said that since 1950, there have been seven other years when the S&P 500 was positive year-to-date at the end of September, but fell negative year to date at some point during the month of October. The final two months of those years were higher six times and up 4.1 per cent on average.

"Historically, the last few days of October have been some of the strongest of the year," Mr Detrick concluded. "With markets looking extremely oversold, the stage could be set for a rally."

BlackRock's Paul Mele also sought to assuage concerns about the sell-off. "Like death and taxes, precipitous market drops also seem to be one of those unavoidable, inevitable realities of life. But what we have observed, at least historically, is that markets have a way of clawing their way back."

Mr Mele also said while large market drops can rattle any investor, those focussed on the long-term need to weather short-term volatility. "Good and bad days tend to cluster together: out of the 25 worst days in the market from 1998-2017, 23 were followed by one of the 25 best days within one month."

Today's Agenda

No local data

Overseas data: China industrial profits September; US third quarter GDP, University of Michigan consumer sentiment October

Capital Economics on pending US data: "The 0.8% m/m rise in durable goods orders in September confirmed that equipment investment growth rebounded in Q3, although the recent slowdown in underlying capital orders growth suggests that its strength is unlikely to be sustained. Otherwise, the advance economic indicators support our previous assumptions that, while net trade was a big drag on GDP growth in Q3, that was almost entirely offset by a surge in inventories. The upshot is that we still expect GDP data due on Friday to show growth of around 3.3% annualised in Q3, down from 4.2% in Q2."

Market Highlights

SPI futures up 73 points or 1.3% to 5701 at 7.15am AEDT

AUD +0.3% to 70.78 US cents

On Wall St at 4pm: Dow +1.6%, S&P 500 +1.9%, Nasdaq +3%

In New York, BHP +1.1% Rio +2.2% Atlassian +4.9%

In Europe: Stoxx 50 +1.1% FTSE +0.6% CAC +1.6% DAX +1%

Spot gold -0.4% to $US1229.38 an ounce at 1.22pm New York time

Brent crude +0.4% to $US76.47 a barrel

US oil +0.5% to $US67.14 a barrel

Iron ore +1.8% to $US76.04 a tonne

Dalian iron ore +0.4% to 534 yuan

LME aluminium -0.2% to $US1994 a tonne

LME copper +0.8% to $US6226 a tonne

2-year yield: US 2.85% Australia 1.98%

5-year yield: US 2.96% Australia 2.17%

10-year yield: US 3.12% Australia 2.61% Germany +0.40%

US-Australia 10-year yield gap at 7.19am AEDT: 51 basis points

From Today's Financial Review

AMP shares lose $2.4b in perfect storm: AMP shares have posted their biggest one-day fall ever as a powerful share market rout and fallout from the Hayne royal commission collided with its decision to sell its life business.

Chanticleer: AMP plunges on simplification: When AMP lost almost a quarter of its market capitalisation on Thursday, or $2.4 billion in value, it said a lot about the heavy price for extracting the company from the highly regulated and capital intensive life insurance sector.

Where are the young female start-ups?: For female entrepreneurs, coming up with a good idea isn't the hard part. Getting investors to listen is. But the times, they are a changin'.

United States

Fed's Clarida backs rate hikes: The Federal Reserve's newly installed No. 2 official backed the US central bank's plans for some further gradual interest-rate increases.

Tesla shares surge on quarterly profit: Tesla shares jumped as Wall Street analysts said the company had turned a corner with profitable third quarter results and might not now need to raise outside capital.

Capital Economics on the rebound: "We think that the bounce in the S&P 500 today after its slump on Wednesday will prove temporary, as investors become even more worried about the outlook for the US economy in the next few quarters."

The Commerce Department said orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, dipped 0.1 per cent last month amid weakening demand for fabricated metals and electrical equipment, appliances and components.

"It looks like business has ordered up all the new equipment they need for now to meet the demand for their goods and services," said Chris Rupkey, chief economist at MUFG in New York. "The third quarter may prove to be the high-water mark for US manufacturing."

According to a Reuters survey of economists, the economy probably grew at a 3.3 per cent annualised rate in the third quarter after expanding at a 4.2 per cent pace in the April-June period. The government will publish its snapshot of third-quarter GDP growth on Friday.

Europe

ECB reaffirms plan to end QE: The European Central Bank stuck to plans to claw back unprecedented stimulus, even as the growth outlook continues to darken.

Euro zone shares ended a choppy session well in positive territory on Thursday as positive corporate results in France and a late boost from a weakening euro - a boon for exporters - lifted the market.

Shares had earlier fallen amid a global sell-off, with weak results from blue chips such as AB InBev or WPP underlining investor concern about slowing earnings growth.

The euro zone STOXX rose 1 per cent with France's CAC 40 gaining as much as 1.6 per cent, lifted by a batch of positive corporate results.

The region's exporters also got a lift from a falling euro after European Central Bank chief Mario Draghi said Europe's monetary union remained fragile, doing little to assuage concerns about financial instability in Italy.

Top of the STOXX was Kion, jumping 13 per cent after the German logistics company reported strong order intake.

Finnish heavy machinery firm Konecranes also rose 12.8 per cent after reporting stronger-than-expected earnings.

WPP shares sank and lost 13.8 per cent after the advertising group cut its outlook, reporting a sharp downturn in trading. The stock hit its lowest level since December 2012 and was down 16 per cent by 0840 GMT.

WPP dragged the media sector down 2 per cent.

AB InBev shares tumbled 10.4 per cent after the Belgian brewing giant halved its dividend due to volatility in emerging markets.

"In every region, both volumes and sales missed expectations. The bright spots were China, Mexico, Western Europe and many African markets while Brazil, Argentina and South Africa faced difficulty," wrote Liberum analysts.

Asia

China blue chips buck global rout: China's main onshore stock market indexes clawed back from midday losses for a second day of weak gains on Thursday.

In Tokyo, the Nikkei share average ended 3.7 per cent down at 21,268.73, its lowest close since March 29.

The broader Topix hit a fresh one-year low, dropping 3.1 per cent to 1,\600.92, causing market capitalisation to fall below 600 trillion yen for the first time since September 2017.

The Nikkei has dropped 13 per cent from a 27-year peak of 24,448.07 touched on October 2.

"We haven't thought that selling would be this steep. This sell-off makes us think the market may be set for capitulation," said Shoji Hirakawa, chief global strategist at Tokai Tokyo Research Center.

Chip equipment makers weakened, with Tokyo Electron tumbling 4.3 per cent, Advantest nose-diving 9.8 per cent and Screen Holdings tanking 7 per cent.

Other manufacturers also had big losses. Sony Corp declined 5.5 per cent, TDK Corp shed 6 per cent and Renesas Electronics Corp losty 6.9 per cent.

"Investors see that US manufacturers surrender to rising material costs, higher personnel costs and slower demand due to trade war, and they worry that these factors will also hit other global companies," said Shogo Maekawa, global market strategist at JPMorgan Asset Management.

Currencies

What is Bill Gross betting on anymore?: When is a self-described "bond fund" no longer a bond fund?

Fed vice chairman Richard Clarida on the outlook for US monetary policy: "... I believe monetary policy at this stage of the economic expansion should be aimed at sustaining growth and maximum employment at levels consistent with keeping inflation at or close to the 2 per cent objective.

"Even after our most recent policy decision to raise the range for the federal funds rate by 1/4 percentage point, monetary policy remains accommodative, and I believe some further gradual adjustment in the policy rate range will likely be appropriate."

TD's take on the ECB and the euro: "While this isn't cause for celebration just yet, Draghi's overall optimism does suggest that the pessimism that was built into EURUSD in recent may have been overdone. Patience may be required however, until a verdict is given on Italy's S&P credit rating (due tomorrow). We expect a negative outlook but its rating left intact.

"In the meantime, we expect EURUSD to be largely contained with 1.1450 the major topside attractor (the range lows for October prior to yesterday's downside break). On the downside, 1.1379 represents a notable pivot followed by 1.13 (August lows), which we expect will be formidable. A move towards here however, may be more of a function of USD firmness than EUR idiosyncratic risk. We think appetite to break below this is low ahead of the US mid-terms."

Commodities

Copper rebounds as inventories slide: Copper prices bounced from two-week lows as a sharp drop in inventories to their lowest in a dozen years outweighed worries about the potential for slower global growth.

Brazil's Vale, the world's largest iron ore producer, is seeking out small high-return acquisitions that are related to the miner's current assets, chief executive officer Fabio Schvartsman said in a results call on Thursday.

Schvartsman also said the company would maintain production cuts in its base metals division this year and next while prices remain low, but forecast an important jump for the segment in 2020.

Marex Spectron's Georgi S. Slavov on what's happening with oil: "Supply of crude oil continues to increase throughout October and the market has finally decided to focus on this development. One example is the fact that the notorious output cuts in Iran or Venezuela have been more than compensated by increases in Russia, USA and number of OPEC member countries. The combined loss of Iranian/Venezuelian oil since the start of 2018 is 0.7mbd while Russia, USA and OPEC have added close to 3mbd. Such numbers are self-explanatory and demand no further thought. We also believe that inventory accumulation in the USA is a result of sharp deterioration of demand."

Slavov also said: "As mentioned, demand for oil in the USA has deteriorated in Q4. Global demand (ex USA) is firmer but there are some early signs of weakness emerging in weeks #43-45. Our bearish demand argument since early October was also based on weak refinery margins. Margins had a negative impact on refinery capacity in operation which was detrimental for the spot crude demand."

Australian Sharemarket

Australian shares have wiped all their gains from the past 12 months. The S&P/ASX 200 Index fell 164.9 points, or 2.8 per cent, to 5664.1 on Thursday, its worst performance since February, wiping $49 billion from the market's combined value.

The material sector took a big hit on Thursday despite a strong lift in iron ore prices, as base metals fell across the board.

BHP led the market lower, falling 4 per cent to $30.80. Rio Tinto took a 4.5 per cent hit, falling to $73.52, South32 slid 3.6 per cent to $3.52, Fortescue Metals dropped 5.7 per cent to $3.64 and Whitehaven Coal went down 6.9 per cent to $4.86.

The major banks delivered modest losses. Commonwealth Bank fell 2.4 per cent to $65.27, Westpac slid 2.5 per cent to $25.84, NAB closed 2.5 per cent lower at $24.53 and ANZ closed at $24.80, down 2.6 per cent.

Of the major financial stocks, Macquarie Group fell 3.2 per cent to $110.13, while AMP tanked 24.5 per cent to $2.50 after it announced it would sell its life insurance division for $3.3 billion and shed its New Zealand wealth management and advice business.