IG | Aug 19, 2015 01:43AM ET
The fear is back
Market fear is growing. Uncertainty is creeping into markets, as well as the economies on both sides of the Pacific, with China driving the fear from west side, the US from the east side.
The disconnect in trading across asset classes is also growing; bond markets, currency markets, and equities markets are clearly not aligned in their belief of futures market movements and events.
And that alone is a risk event waiting to happen, as they will align when one is proven right – and this will happen sharpish!
The China dilemma
The short-term effects of all this are coming to a head at once. Copper made a new six-year low and is likely to cross below US $5000 a tonne in the next few days – this would mean high-end producers will be treading water, and even making a loss for every tonne they pull out.
Nickel, aluminium and zinc are welded in bear markets, and with the China demand story under pressure, they will remain so in the foreseeable near-future.
The US Fed dilemma
In conclusion, commodities are being dumped, currencies are directionless, bond spreads are widening, yet equities are still seeing upside.
This is the same disconnect seen in 2008 and in 2011 during the GFC and the Euro Crisis. The difference is that the Fed is holding the keys to future movements – if the risks are too great to raise rates, it may hold off.
How the market reacts to either option (lift-off or holding on to the status quo) is undefinable and the markets are demonstrating this. Therefore, one market that will likely see upside on either outcome is the VIX, as fear spills into trading.
Ahead of the Australian open
The ASX is well and truly caught up in macro-fear currently. Since the April high of 5999, the ASX has lost 11.6%, with the banks being the biggest contributor to this decline – all have lost more than 15% in that time. The fact that more regulation and capital is expected to be announced in FY16, coupled with fears of being ex-growth and leveraged to a market that is also likely to be ex-growth in Australian housing, it’s hard to make a case for the ASX to recover 65%, or even 50% by year-end.
I find it interesting that the last two weeks of trade have not seen the XVI (the Australian VIX index) back at the July highs. If the sustained selling continues, it should pass the July high as put protection ramps up.
So far, earnings season has been better-than-estimated. However, with the likes of Woodside (ASX:WPL), BHP (NYSE:BHP) and South32 (ASX:S32) yet to report, earnings season may still disappoint.
We are calling the ASX up 17 points to 5320, which would mean bucking overnight leads. The ASX is oversold, however, the macro back drop and the commodities markets are currently making it hard to be positive.
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