Global stocks fell heavily on firming signals that the US economy could be set to join China and Europe in slowdown ahead of a critical meeting by the US Federal Reserve this week that could reset the path for interest rates in 2019.
The S&P/ASX 200 Index fell 68 points or 1.2 per cent on Tuesday after Wall Street hit a 14-month low following a 2.2 per cent loss by the S&P 500. The Nasdaq fell 2.3 per cent and the Dow Jones Industrial Average dropped 2.1 per cent.
“The US sharemarket is wrestling with peak earnings growth, a flattening yield curve and widening credit spreads. The US markets’ price-to-earnings de-rating has been the fourth most vicious in 40 years," said Ben Griffiths, portfolio manager at Eley Griffiths Group.
“The lows of February this year are proving to be magnetic and a capitulation sell-off seems imminent beyond the somewhat orderly retracement witnessed to date. The mood is further darkened by a crude oil sell-off and US-China trade war," the fund manager added.
Second-tier data failed to calm investors, who are uneasy about the outcome of the Fed’s final meeting of the year (due Thursday morning AEDT), the undercurrent of trade tensions and risk of a partial government shutdown.
The headline Empire State Manufacturing index dropped 12 points to 10.9 points for December, well below the 20 points economists had been expecting, while the NAHB housing market index showed a reading of 56 compared with the 60 expected by economists. The softer data was framed by weaker industrial and retail sales activity from China last Friday.
“It’s not only the absolute level of growth, it’s the margin pressure that’s starting to come through," said Russell Investments strategist Graham Harman. “Oil’s obviously eased back but it’s had a real run there. All through the Beige Book you’re hearing about transport costs, wage costs."
Still, Mr Harman sees at least another two or three hikes by the Fed next year.
“There’s a whole debate about whether a 3 per cent interest rate will kill a growth expansion, no matter how flat or inverted the yield curve may be. The other thing that’s happening is inflation has, to some extent, worldwide stalled a little," he said.
Selling in the US market has been contagious in what is historically a positive month for Australian shares. Macro concerns have been underlined by worries that Australian households are putting the brakes on consumption growth this quarter in the face of declining house prices.
“We were expecting a Santa rally but it’s more a case of Frosty the Snowman," JPMorgan strategist Kerry Craig said, referring to lack of returns this month. “Markets are worried that there’s a slowdown in the global economy."
The Fed is widely expected to raise its key cash rate 25 basis points to a range of 2.25 to 2.5 per cent. Futures are pricing in a 66.7 per cent chance of a 25-basis-point rate increase this week. That has decreased from a week ago, when futures were indicating a 69.9 per cent probability of a quarter of a percentage point hike.
“I think that the interpretation of the Federal Reserve [rate increase path] has gone too far," said Annette Beacher at TD Securities. “We had three hikes but we shaved that to two."
The question is whether the Federal Reserve will deliver a “dovish" hike, the TD strategist said, where the market gets a rate increase but some of the Federal Reserve Open Market Committee members reduce their expectations for future hikes via the “dot plot" guidance.
Russell’s Mr Harman said that when valuations are elevated late in the market cycle, it does not take much to trigger a fierce sell-off.
“You don’t need a reason, the burden of proof is turned around a little," he said. “I would be looking at the slowdown in earnings growth in conjunction with some elevated valuations."
On Tuesday, the Reserve Bank of Australia released the minutes from its December policy meeting, held a day before the release of a much-weaker-than-expected GDP result, which put year-on-year growth at 2.8 per cent versus the 3.3 per cent growth the market was looking for. Economists expect it will have to downgrade growth next year.
“The Reserve Bank has been pretty rock solid all year in terms of ‘glass half full’," Ms Beacher said. “They have done a terrific job promoting confidence and stability."
In an uncertain market, Mr Griffiths said he likes stocks that offer earnings growth at a reasonable price. “Earnings certainty will be rewarded in this market," he said. He is keen on Aventus Group, IMF Bentham and Synlait, and added gold names. “The prevailing market is understandably shunning thematic, momentum names, over-owned and full of profits," he added.
Necessary cookies are absolutely essential for the website to function properly. These cookies ensure basic functionalities and security features of the website, anonymously.
|cookielawinfo-checkbox-analytics||11 months||This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Analytics".|
|cookielawinfo-checkbox-functional||11 months||The cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Functional".|
|cookielawinfo-checkbox-necessary||11 months||This cookie is set by GDPR Cookie Consent plugin. The cookies is used to store the user consent for the cookies in the category "Necessary".|
|cookielawinfo-checkbox-others||11 months||This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Other.|
|cookielawinfo-checkbox-performance||11 months||This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Performance".|
Functional cookies help to perform certain functionalities like sharing the content of the website on social media platforms, collect feedbacks, and other third-party features.
Performance cookies are used to understand and analyze the key performance indexes of the website which helps in delivering a better user experience for the visitors.
Analytical cookies are used to understand how visitors interact with the website. These cookies help provide information on metrics the number of visitors, bounce rate, traffic source, etc.
Advertisement cookies are used to provide visitors with relevant ads and marketing campaigns. These cookies track visitors across websites and collect information to provide customized ads.
Other uncategorized cookies are those that are being analyzed and have not been classified into a category as yet.