Market wrap: Sharp overnight falls in U.S. equities, resource prices and the Australian dollar point to a weak start to local trade.
The December SPI futures contract closed 36 points or 0.77% lower at 4633 this morning after Wall Street was spooked by an interest rate rise in China, growing mortgage problems for the U.S.'s big banks and disappointing earnings results. A jump in the U.S. dollar fuelled heavy selling in precious metals and oil.
The Dow suffered its biggest reversal since mid-August, sliding 188 points or 1.69% to close back under 11,000 at 10,956. The S&P 500 fell 1.59% from yesterday's five-month high and the Nasdaq lost 1.76%.
China yesterday moved again to contain the risk of a property bubble developing by raising lending and deposit rates for the first time since 2007 by 25 basis points. The news added to pressure on U.S. futures that were already weak before the market opened because of poorly-received profit reports from Apple and IBM.
"The move to cool the world's second-largest global economy bites into the prospects for global growth and therefore investors' appetite for risk," a senior market analyst at Interactive Brokers told MarketWatch.
Financial stocks resumed their downtrend after news that Bank of America is under pressure to buy back bad mortgages. Tech stocks were hurt by the results from IBM and Apple. Both beat forecasts but Apple sold fewer iPads than analysts expected and IBM signed fewer service deals.
Energy stocks were the hardest hit sector in the S&P 500 as the U.S. dollar rebounded after the Chinese rate hike sparked a rush back to "safe assets". The dollar was also helped by a commitment from Treasury Secretary Timothy Geithner that the U.S. government will not devalue the currency.
The dollar index, which rates the buck against six major currencies, was recently up 1.7% - its biggest intraday rise since August. The Australian dollar wilted, sliding more than 2% to trade recently at 96.9 U.S. cents.
Oil suffered its biggest one-day fall in eight months, hurt by the move from risk assets and the prospect of lower demand from China. Crude futures were recently down $3.62 or 4.4% at $79.45 a barrel.
Precious metals also endured a torrid session. Gold had its worst one-day fall since July and December silver fell 2.6% to mid-October levels. The spot gold price was recently down $37.10 from Monday's New York close at $1,332.50 an ounce.
Industrial metals pulled back from multi-month highs on demand concerns over China. In late trade in London, copper was down 2.8%, aluminium 3%, lead 2.2%, nickel 2.1%, tin 2.8% and zinc 2.3%.
The major European markets fell as mining stocks lost ground. Britain's FTSE fell 0.67%, Germany's DAX 0.4% and France's CAC 0.71%.
TRADING THEMES TODAY
OUCH: This market has looked vulnerable to a heavy fall for weeks now and here it is. The leads for our market could hardly be worse this morning: a sharp retreat on Wall Street, oil smashed, precious metals knee-capped, industrial metals down, a demand cloud over our major trading partner... BHP, RIO and AWC all lost more than 4% in U.S. trade, so we know what our mining stocks can expect. Our saving grace is that our market has avoided the recent excesses on Wall Street, hampered by a strong dollar, and therefore does not have as far to fall this morning. At least, that appears to be the thinking on futures markets. I suspect that futures number is a little over-optimistic, but let's see what the day brings.
SAFETY FIRST: There was a sharp move last night away from so-called "risk assets" (equities, commodities, the Australian dollar) to "safe assets" (bonds, the U.S. dollar). It may be no more than a one-day wobble within the recent strong up-trend but these tremors are often a harbinger of a bigger quake ahead. I'll take it as a cue to amend my own trading plan to a more defensive model, relying on smaller buys, shorter holding periods and tight stop-loss discipline. This is a good time to consider your exposure to the market and to act if necessary. How will your holdings fare if this turns into a genuine reversal? Trade your stop losses and use running stops on successful trades to keep those profits.
ECONOMIC NEWS: The monthly leading index of economic indicators is due at 10.30 am. A relatively light session in the U.S. tonight includes the Federal Reserve's "beige book" and crude oil inventories.
