Morning Note - Big sell off overseas

by James Gerrish 23 February 2011

** 23/02/11  - 8.57am  -  by James Gerrish** 
 
  • A significant selloff in overseas markets last night with the DOW JONES down more than 200 points just before the close. 
  • The S&P 500 was also sharply lower (-2.11%) and has now traded back to its uptrend that has been in place since November. 
  • An escalation of Libyan tensions sent Oil higher and this stokes fears that a high oil price is a negative for growth and could derail the recovery. 
  • High prices undermine consumer confidence and any further threats to supply from the Middle East will propel Oil higher - this is a real threat at this stage and the fate of the Oil price is really in the hands of the Libyan Leader – so obviously very hard or near impossible to call!  
  • It’s understandable that investors have dumped stocks after  hearing  Libyan Leader Muammar Qaddaffi vow to fight the rebellion until "his last drop of blood" and pledged to deploy police and army to restore order tomorrow - he also encouraged his supporters to reclaim the streets.
 
  • Closer to home, the tragedy in Christchurch is dominating the airways and our prayers go out to those affected. 
 
  • Locally, the big question is whether this pullback is a short term correction or something more sinister. The reality is that when markets turn bearish as they did overnight, a flow of negative news/commentary seems to filter out and arguments that have been surpressed while the market continued higher get there time in the sun. 
  • Its important in times like this that we try to separate ourselves from the noise and look at the price action of our key markets. 
  • Firstly, the S&P 500 (SEE CHART) has pulled back to its longer term trend - it is yet to break this level but it does look ominous. 
  • The commodity index (SEE CHART) looks to be forming a topping pattern with the timing (45 days between corrections) playing out at current levels. 
  • Not surprisingly, the Volatility Index has spiked from historically low levels and hit 21 overnight (SEE CHART). If you recall back to the GFC, the Volatility Index was trading above 90 (and incidentally, a 200 point night on the DOW was a quiet session!)
  • Its interesting to see that the US Dollar is no longer a safe haven play. Normally in times of political instability and unrest, the USD is the place to be. This is no longer the case with QE2 continuing to put pressure on the greenback. (SEE CHART)
 
  • My personal view is that we'll see a shorter, sharper pullbackrather than something more prolonged. The reality remains that US economic conditions are improving while emerging markets are being supportive. I haven't yet seen anything to change that view for now. 
  • The Fed seems determined to keep the recovery on track and I still think it’s a dangerous call to fight the Fed at this stage. 
  • A short term correction YES- a resumption of a longer term bear market as some are suggesting - NO.
 
  • SPI FUTURES are down -44 pointssuggesting a weaker open this morning.
 
 
  • Stocks trading overseas
    • In New York, News Corp fell by US$0.93 to US$17.80, equivalent to A$17.82, A$0.21 below its last close on the ASX.
    • ResMed fell by US$0.85 to US$31.99, equivalent to A$3.20, A$0.02 below its last close on the ASX.
    • In London, Rio Tinto rose 29.0 pence to £43.41, A$0.47 higher in Australian currency terms.
    • BHP-Billiton rose 38.5 pence to £24.13, A$0.62 higher in Australian currency terms.
    • Henderson Group Plc fell 2.7 pence to £1.58, A$0.04 lower in Australian currency terms.

Disclaimer

James Gerrish is an Authorised Representative (Rep No. 352904) of Shaw Stockbroking Limited ("Shaw Stockbroking"). Shaw Stockbroking is a holder of Australian Financial Services Licence No 236048. Shaw Stockbroking, its directors, officers, associates and employees each declare that they, from time to time, may hold interests in financial products and/or earn brokerage, commission, fees or other benefits from financial products mentioned in this e-mail or attached documents. Unless specifically stated within this page or an attached document, any information communicated by this e-mail constitutes unsolicited general financial product advice which has been compiled without regard to any investor's individual objectives, financial situation or needs. It is not specific advice for any particular investor. Before making any decision about the information provided, you need to consider the appropriateness of this information having regard to your individual objectives, financial situation and needs and consult your adviser. Any indicative information and assumptions used here are summarised and also may change without notice to you, particularly if based on past performance or relate to a future matter.
 

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