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.

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