A global "flight to safety" ahead of possible military action against Syria has Australian shares facing sharp falls at today's open.
The September SPI 200 futures contract dived 55 points or 1.1% to 5068 as Wall Street suffered its biggest decline in two months and gold, government bonds and oil rallied.
The S&P 500 slumped 27 points or 1.62% to its weakest close since early June. The Dow lost 170 points or 1.44% and the Nasdaq 2.15%.
The declines came as the US mustered support among allies for a military strike on the Syrian government following reports that Bashar al-Assad's regime used chemical weapons against civilians in violation of international law last week. US Defense Secretary Chuck Hagel said the US had forces "ready to go". Sources at a meeting in Istanbul said air strikes could come in the next few days. Russia, China and Iran warned against military intervention.
"This is the largest geopolitical risk since the start of the Iraq war," the chief market strategist at JonesTrading in the US told Reuters. "I am not saying it will escalate to that point, but this war of words with Russia is the first time the US is pitted against another global in a long time. That creates an uncertainty this market is not accustomed to."
Financial and technology stocks led the US rout. The Russell 2000 index of small caps tanked 2.4%, while the energy price-sensitive Dow Jones Transportation Average fell 2.59%. The defensive utilities sector was the pick of the 10 S&P industry groups.
Wall Street's "anxiety index", the VIX, spiked 12% overnight to its highest level in nine weeks. The yield on 10-year Treasuries declined eight basis points as institutions moved back into the perceived safety of government bonds.
Also weighing on sentiment was the looming US debt ceiling in mid-October and the start of the great Federal Reserve stimulus taper as early as next month. A round of upbeat economic reports had little impact following heavy losses in European share markets. Consumer confidence unexpectedly improved this month, house prices rose in June and business activity in the mid-Atlantic region accelerated faster than predicted last month.
"The economic reports, while decent, don't seem to be having much of an impact on today's market," Brad Sorensen, director of market and sector analysis at Charles Schwab, told MarketWatch.
Key European markets closed near one-month lows following their biggest falls since late June. Germany's DAX slipped 2.28%, France's CAC 2.41% and Britain's FTSE 0.79%.
Oil commanded its highest price in a year and a half as the prospect of western intervention in the Middle East inflated the risk premium. West Texas Intermediate crude oil for October delivery was lately $3.04 or 2.9% higher at US$108.96 a barrel.
Gold officially entered a bull market as haven-buying saw the metal rise more than 20% off its late-June low. Gold for December delivery was recently ahead $22.10 or 1.6% at US$1,415.20 an ounce.
The downbeat mood in Europe placed mild pressure on base metal prices. In London, copper dipped 0.6%, aluminium 0.3%, nickel 0.7% and zinc 0.2%. Lead put on 0.6% and tin added 0.3%. US copper for September delivery was recently up 0.1% or less than a cent at US$3.33 a pound.
BHP and Rio Tinto were caught up in the general sell-off in the US. BHP dropped 1.97% in US trade and Rio lost a hefty 3.21%. Spot iron ore for import to China was unchanged yesterday at US$138.70 per dry metric tonne.
TRADING THEMES TODAY
CAUTION PREVAILS: The only surprise about the overnight falls is that yesterday's US futures weren't a fair indicator of what was to come. Our market cheerfully used yesterday's ASX opening decline as a buying opportunity and therefore has quite a bit to give back today to realign with the rest of the globe. Add Syria to the looming US debt ceiling and Fed taper and the bears might build enough momentum for a reasonable pullback over the next few months. The spec end of the market remains bullish but won't be able to resist broader market trends if this turns into a proper retrace. If! For the bullish, there should be good buying opportunities today. Another heavy menu of domestic corporate earnings includes ABP, AGK, CHC, MTS, MYT, PRT, ROC, SFR, SXY, TSE, WOW and WTF (sources: Fairfax, BRR).
ECONOMIC NEWS: Quarterly construction data is due at 11.30am EST. Pending home sales and crude oil inventories are the highlights tonight in the US.
