The Overnight Report: Flash Crash

Array
(
    [0] => Array
        (
            [0] => ((JHG))
            [1] => ((MFG))
            [2] => ((SCP))
        )

    [1] => Array
        (
            [0] => JHG
            [1] => MFG
            [2] => SCP
        )

)

This story features MAGELLAN FINANCIAL GROUP LIMITED, and other companies.
For more info SHARE ANALYSIS: MFG
The company is included in ASX200, ASX300 and ALL-ORDS

By Greg Peel

Pass the Codral

At its peak in January, the S&P500 index in the US had risen so fast it was 7% above its 50-day moving average and 14% above its 200-day moving average – overbought at an historical level. The ASX200 closed lower over January from December.

On Friday night the S&P fell -2%. Yesterday the ASX200 fell -1.6%, almost one hundred points. There is no logical reason the Australian market should have to follow the US market to the downside when it hasn’t to the upside but logic flies out the window at such times. And there is an old adage on Wall Street that the market never bottoms on a Friday.

Meaning watch out for the Monday, and sure enough, Wall Street has free-fallen. Yesterday’s sellers in Australia possibly feared as much. Yesterday the index held above support at 6000 but it won’t today, with the futures down around -139 points this morning.

Selling was relatively market-wide and indiscriminate yesterday although there was a flight to the “safety” of bond proxies, with utilities holding firm when all about them fell. Healthcare otherwise posted the smallest drop, of -0.6%. Energy (-2.6%) was the worst performer. Energy had risen by the same percentage in Friday’s trade.  Telcos (-1.5%) are no longer defensive.

Once upon a time even banks (-1.3%) were considered defensive.

Good news may come in the form of another old Wall Street adage – Turnaround Tuesday. But for now, stand back.

Pandemonium

I recall watching US business television in the heady days of September 2008 as the Dow flew around so fast an -800 point drop could turn into a 300 point gain in the time it took to make a cup of tea. I have never seen anything like last night’s action on the NYSE. And I was trading in 1987.

Wall Street dropped sharply on the open last night, presumably as those investors who were stunned rabbits on Friday night decided to bail. But quickly indices recovered to return to the flatline by around 11am.

The selling gained momentum once more, a couple more attempts to rebound failed, and early in the afternoon, the S&P500 broke its 50-day moving average. At 3pm Wall Street was down another -2%. By 3.30pm down -3%. As we moved into the final hour it was -4%. One CNBC commentator made note that the NYSE circuit breaker kicks in at -7%, and I thought “Well we won’t get that far”.

When the Dow hit -1000 points down, a trapdoor opened. Within a heartbeat the average was down -1600 points, over -6%, and I thought “My God, the NYSE is about to shut the market”. But it didn’t quite get that far.

A few minutes later, the Dow was down only -800. The last half hour saw a more orderly, if we can call it that, drop to a close of down -1175, or -4.6%, with the S&P down -4.1% and the Nasdaq -4%.

It’s the biggest single day Dow move in history and the biggest intraday move. But to put it into perspective, the biggest single day in 2008 was a near -800 point move or -7% back then, and in October ’87, the Dow dropped around -100 on the Friday night and -500 on the Monday night, and Monday was -25%.

All commentators agree this was a “mechanical” selling session. The algos took over. One lot of algos were trying to sell at lightning speed as another set of algos cancelled buy orders just as quickly.

The VIX volatility index leapt almost 90% to 32, but that’s rather misleading as well. Out of the money puts that were worth next to nothing last week were suddenly right on the money and thus a lot more expensive. It is not really a great “fear” indicator.

Perhaps the great irony on the day was the move in the US ten-year yield. Wall Street has now wiped out all of January in the first days of February and it’s all because of rising US rates. A jump in the ten-year of 7 basis points to 2.85% on Friday night, following the strong wage growth number, sparked this equity rout. Last night the ten-year fell back -6 basis points to 2.79%.

And the rout can specifically be attributed to fear the Fed will be too aggressive in its rate hikes in 2018, given the first real signs of inflation. But now that we’re eighteen hundred points lower in the Dow in two days, the market has completely reversed its thinking.

A March rate hike was two days ago considered an almost 100% chance. After last night, it’s only 75%. Last week there was concern the Fed might hike four times in 2018 instead of three. Now the chance of even a third rate hike has fallen to below 50%.

It’s somewhat of a bizarre feedback loop.

It’s not so bizarre that when the stock market is sold off, money finds its way into the safe haven of bonds. Ditto gold. On Friday night the US dollar jumped 0.6% and gold fell -US$18. Last night the dollar index rose another 0.4% and gold rose US$8. No one was at all scared on Friday night. They were pretty damned frightened last night.

Turnaround Tuesday. Commentators on Wall Street were of one voice last night – what a great buying opportunity! In the blink of an eye, the “overbought” premium has been wiped out and on the back of strong earnings growth, a strong US economy, tax cuts, infrastructure spending – you name it – there’s no reason why this is not a healthy, albeit sharp, pullback to more realistic levels.

Let’s hope so.

Commodities

It’s not the sort of session in which you’d expect iron ore to jump 3%, but it did. The mixed moves in base metals are also representative of any other normal session. No panic in metals markets.

More panic in oil.

At least the Aussie’s another -0.3% lower at US$0.7905.

Today

The SPI Overnight closed down -139 points or -2.3%. Through most of 2017, 5800 was a brick wall resistance level for the ASX200. It should now be solid support, if indeed we were to get that far.

Wall Street will no doubt be a hot topic of conversation as the RBA meets today.

We’ll also see Christmas retail sales and trade numbers, but they won’t get much of a look in.

Not a great time to be releasing earnings results that might be good, but no one will care. Janus Henderson ((JHG)), Magellan Financial ((MFG)) and Shopping Centres Property ((SCP)) are among the privileged today.

Rudi will appear on Sky Business this morning, via Skype link around 11.15am, to discuss broker calls.

The Australian share market over the past thirty days…

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available on the FNArena website.  Click here. (Subscribers can access prices on the website.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's – see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts on the website and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

Click to view our Glossary of Financial Terms