Market wrap: Shares are set to open at a 10-week low following heavy falls on overseas markets after tensions flared on the Korean peninsula.
The December SPI futures contract ended the night session 51 points or 1.1% weaker at 4554 after an exchange of fire between North and South Korea rattled share markets in Europe and the U.S. Investors abandoned so-called "risk assets" - equities, oil, industrial metals and the Australian dollar - in favour of the perceived safety of gold, bonds and the U.S. dollar.
Yesterday's losses across Asian markets continued in Europe and then the U.S., where the Dow dipped below 11,000 before closing 142 points or 1.27% weaker at 11,036. The broader S&P 500 lost 1.43% and the Nasdaq, which resisted the down-trend on Monday night, fell 1.46%.
"It's a fear day," a fund manager at RidgeWorth Capital Management in the U.S. told Bloomberg. "You have European debt worries, tension in Korea, a hedge-fund investigation, a weak housing report - there's a tremendous amount of bad news to absorb. That's not going to encourage risk appetite."
The fresh outbreak of hostilities in Korea and on-going concerns about European sovereign debt overshadowed signs of improvement in the U.S. economy. Revised figures showed the economy grew at an annual rate of 2.5% in the third quarter, much stronger than the 2% figure previously calculated. However, the housing market continued to flounder, with purchases of existing homes falling a worse-than-expected 2.2%.
The euro continued to tumble in the aftermath of Ireland's decision to accept a rescue package and amid a swing back to the U.S. dollar. The euro fell 1.8% against the greenback, helping the U.S. dollar index rally 1.3%, after German Chancellor Angela Merkel said the euro was in an "exceptionally serious" situation. The Australian dollar was recently down 1.65%, buying 97.27 U.S. cents.
Gold, seen as a safe haven in times of geopolitical tension, rallied. The spot price was recently $9.60 stronger than Monday's New York close at $1,376 an ounce. Spot silver was 35 cents weaker at $27.52 an ounce.
Industrial metals sagged as investors rotated into other assets. In late trade in London, copper was down 1.6%, aluminium 1.6%, lead 3.3%, tin 1.8% and zinc 2.2%. Nickel was unchanged.
"We could see this 'short dollar', 'long commodity' trade rotate and start to see 'strong dollar', 'weak commodities', 'short euro' trade starting all over again," the managing director with TrendMax Futures in the U.S. told Reuters.
Oil maintained its inverse relationship with the U.S. dollar but trimmed losses later in the session. Crude futures were recently down 26 cents or 0.3% at $81.47 a barrel.
Jittery European markets ended with sharp losses as the Korean situation added to worries over sovereign debt. Britain's FTSE fell 1.46%, Germany's DAX 1.72% and France's CAC 2.47%.
TRADING THEMES TODAY
SAFETY FIRST: The pendulum that swings between fear and greed to drive markets has swung firmly back towards the former. Share markets are now in full pullback as investors rotate into safer assets, including gold, bonds and the U.S. dollar. Today on the ASX is likely to be bloody, even though we took a pre-emptive dose of medicine yesterday. Our market just might have fallen far enough to draw in buyers, but it would be brave to go in boots and all with Korea another wildcard on the table. The sectors likely to fare best today are gold and defensives, such as health and utilities. But bear in mind that big red days tend to drag down all sectors. The smaller end of the market will likely get walloped, although there are always exceptions.
BOUNCE SCALPS: My strategy on days like this is to scan pre-market for shares that are likely to open near a significant support level and that have in the past shown a propensity for bouncing. I then set alerts at my target prices and get ready to jump on any opportunities in the first half hour. I mainly target the mid-caps or better small-caps, where liquidity is deep enough to offer an escape route if a trade doesn't work out. Liquidity tends to dry up at the small end of town during pullbacks. My aim is to buy four or five shares in the first 20 minutes and look to unload before lunch unless the market shows genuine signs of rallying. These are intraday trades.
ECONOMIC NEWS: The monthly leading index is due at 10 am, followed by a quarterly construction report at 11.30 am. The U.S. crams a heavy schedule tonight ahead of tomorrow's Thanksgiving Holiday including weekly unemployment claims, core durable goods orders, the price index, personal spending, personal income, new home sales, the house price index, crude oil inventories, natural gas storage and revised consumer sentiment and inflation expectations.
