8@eight: ASX set to slide as market sentiment sours

The Australian sharemarket is poised to retreat at the open after a mixed night on Wall Street. The Dow and S&P 500 finished sharply lower but tech stocks continued their bullish run to push the Nasdaq higher. Shortly before 7am AEST, futures are pointing to a fall of 24 points, or 0.4 per cent, at the open.

1. Risk aversion takes hold as market sentiment takes a hit: There was a clear risk aversion and search for safety in financial markets overnight. There was very little panic about it, and the swings in price action were well within the realms of what might considered normal, in what’s proven to be a range bound market this recently. As has been the case all week, volumes flowing through the market were well below average.

The S&P 500 and Dow Jones retreated on Thursday.

The S&P 500 and Dow Jones retreated on Thursday. Credit:AP

The VIX edged higher, to record a reading of roughly 28 by Wall Street’s close. Equities and other risk-sensitive assets fell across the board, as traders rotated towards safe-haven assets.

2. COVID-19 returns as the major driver of prices: The general aversion to risk overnight was being pinned on COVID-19 developments. The official data continued to paint an ugly picture of the health crisis in the US. New infections yesterday climbed by another 2 per cent, topping 60,000 new cases in a single day for the first time.

More concerningly, the hot-spot states of Florida and Texas reported their biggest one-day increase in COVID-19 deaths, throwing into some doubt the argument that the virus’s mortality rate in the US is falling and ought to remain low.

3. Traders seek out havens on COVID-19 fears: It would seem that fears of a spike in COVID-19 deaths, and the potential for stricter lockdowns in the US, drove the flow into safe haven assets. The US Dollar rallied, aided by some stronger than expected US jobless claims numbers, as did the Japanese Yen.

European currencies broadly declined, while the Australian Dollar shed 0.25 per cent. The Canadian Dollar found itself at the bottom of the G10 currency map, with the Loonie dragged down by a 2-3 per cent drop in oil prices. Gold prices did decline however, largely owing to the stronger Dollar, though it remains above the key $US1800 level.

4. US bond market sending out a warning sign: The most remarkable and perhaps illustrative moves came in the US bond market however. US Treasury yields plunged and the yield curve flattened considerably, with the US 10 Year note dropping 5 basis points to 0.61 per cent.

The flow into long-term US government debt is being touted as a harbinger by many bears in the market currently, who’re suggesting the inability of US sovereign yields to pick-up meaningfully in recent months is an omen that other financial markets are currently mispricing risk and economic fundamentals.

5. Global equity indices decline; US tech adds to record run: Downside risks to the global growth outlook clearly manifested in equities just last night. European and US stock indices broadly fell, with the FTSE100 tumbling 1.73 per cent, the DAX dipping a modest 0.04 per cent, and the benchmark S&P500 shedding 0.5 per cent. Cyclical sectors led the losses across all bourses.

Notably, US tech still managed to sustain its recent rally. Perhaps aided by the COVID-19 induced aversion to risk, and the drop in long-term rates, the NASDAQ gained 0.53 per cent, to clock-up a new record high.

6. US-China tensions increase, but Chinese stocks don’t care: As has been the case recently, heightening US-China tensions still appear as though they’re being shrugged off by market participants. The conflict escalated a little further overnight, after the Trump administration looked expedite a ban on commerce between US companies and 5 major Chinese companies, including Huawei.

Remarkably, Chinese stocks have continued to outperform this week, even in light of growing geopolitical risks to the Chinese economy. The CSI300 rallied another 1.4 per cent yesterday, extending its month-to-date gain to 16.25 per cent.

7. ASX200 held together by stronger commodity stocks: A soft overnight lead from Wall Street is setting up the ASX200 for a drop of 0.4 per cent at the open this morning. The move will add to what’s been a soft week for the Australian stock market, which has found itself stifled by fears relating to the economic impacts of Victoria’s COVID-19 outbreak. That nervousness was even apparent yesterday in the market, despite the ASX200’s 0.59 per cent rally.

COVID-19-sensitive sectors of the market, such as financials, real estate and consumer stocks traded flat, with the ASX200 gaining largely by virtue of a big uplift in mining and commodity stocks.

8. Market watch:

ASX futures down 24 points or 0.4% to 5896 at 6.59am AEST

This column was produced in commercial partnership between The Sydney Morning Herald, The Age and IG

Information is of a general nature only.

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