Asian market meltdown. What it means for you
Asian financial markets were roiled again yesterday by a renewed sell-off on Wall Street as economists predicted faster US interest rate rises amid stronger global economic growth and fiscal stimulus.
While Australia’s sharemarket remained resilient by comparison, China’s bourse suffered its biggest falls since the meltdown two years ago that was followed by an unprecedented fiscal stimulus by Beijing in response to a slowing economy.
China’s Shanghai Composite dived as much as 6 per cent yesterday, triggering widespread trading halts. The accelerated sell-off in China’s retail investor-dominated market came ahead of the usual seasonal squeeze on liquidity due to the nation’s 10-day Chinese New Year holidays. The Chinese yuan, which on Thursday suffered its biggest one-day fall in value since 2015, recovered slightly.
But Australia’s S&P/ASX 200 index fell just 0.9 per cent to 5838 points on heavy trading volume. The local market recovered half of an intraday fall to 5786.8 as cashed-up investors continued to scoop up bargains in high-quality companies after the local index fell almost 6 per cent from the decade high of 6151 points it hit four weeks ago amid booming global sharemarkets.
The Australian dollar — which hit a 2½-year high of US81.36c a week ago — hit a six-week low of US77.59c as the US dollar contin- ued its week-long recovery against most currencies.
Scott Morrison yesterday said there was “a big difference” between what was happening in the Australian real economy and markets and what was happening on Wall Street.
“In the US, the market grew far more substantially, the earnings ratios were significantly more elevated than what they were in Australia,” the Treasurer said.
“While we see a correction taking place in the US, that has ripple effects around other markets that recalibrate.
“The longer-term investors understand that and will continue to be patient.”
Speaking at the Goldman Sachs Macro Conference in Sydney, global chief economist Jan Hatzius predicted four rate rises
from the Fed this year and next year — way more than the recently upgraded market consensus estimate of a total of four increases over the two years.
“I think we are in a period where we probably have to digest some of the increases in pricing and the sell-off in the bond market that has occurred, but over time there’s still quite a bit of upside in Fed tightening expectations,” Mr Hatzius said.
On Wall Street, the major stock averages fell about 4 per cent on Thursday to be down a total of about 10 per cent from the record highs they hit two weeks ago after parabolic gains in January. Shares in London last night opened 0.4 per cent lower and European benchmark the Euro Stoxx 50 was down 0.2 per cent.
The S&P 500 and Nasdaq 100 both hit fresh 2½-month lows as the US 10-year Treasury bond yield hit a four-year high of 2.88 per cent for the second time this week and sharemarket volatility remained elevated way beyond the record lows reached last year.
After stronger-than-expected US average hourly earnings data last Friday pushed US bond yields up to three-year highs, the broader US sharemarket was hit by selling that pushed the CBOE VIX “fear index” of implied 30-day volatility in S&P 500 futures up from 13.47 per cent to 17.31 per cent.
On Monday the index jumped from 17.31 per cent to 37.32 per cent in its biggest one-day rise ever. It exploded to 50 per cent on Tuesday as some extremely high risk products like the Credit Suisse-issued VelocityShares Daily Inverse VIX Short-Term ETN were liquidated. Others such as the Proshares short VIX ShortTerm Futures ETF survived the VIX explosion, but would have come under immense pressure on Thursday when it rose from 21.17 per cent to 33.46 per cent.
“Of course, there is a question about the tightening in financial conditions we’ve seen and to what extent does it pose a risk to this hawkish Fed view,” Goldman’s Mr Hatzius said. “It has been a fairly sizeable move, so our Financial Conditions Index has tightened by about 70 basis points in the past two weeks. It’s a big move, but this needs to be considered in light of the very sizeable easing of conditions previously. We had a very large easing overall (in) US financial conditions post-tax reform and we have now basically given that back, mainly through the equity market.
“Conditions do need to be somewhat tighter so in some ways this is actually not all bad,” he added. “The linkage between financial conditions and growth changes over longer periods of time — maybe a year — is what matters for economic growth, rather than a change over a few weeks. So we still think that we’re likely to get a positive impact from financial conditions even after the recent sell-off.
“It is highly likely we will have some degree of overheating in the US economy.”
JPMorgan Asset Management global market strategist Kerry Craig said: “A reassessment of the inflation outlook at this point in the cycle is natural and markets are adjusting for this. Importantly, investors should remember that US inflation pressures are firming rather than spiking, but markets still haven’t adjusted to the expectation that the US Federal Reserve could raise rates four times in 2018.”
RBA governor Philip Lowe made it clear this week the bank felt no pressure to follow its global counterparts in raising rates, saying Australia’s floating exchange rate gave it flexibility to make policy based on domestic conditions. Dr Lowe said he “does not see a strong case” for rates to be changed in the near term.