Market wrap: Australian shares look likely to open at a six-week low after a gloomy outlook from the US Federal Reserve fuelled heavy falls on Wall Street.
The December SPI futures contract ended the night session 105 points or almost 2.6% weaker at 3980 as the launch of the Fed's "Operation Twist" liquidity program failed to soothe jittery investors. European stocks fell ahead of the announcement and commodity prices sagged as the US dollar surged.
US stocks accelerated losses late in the session after the Fed cited "significant downside risks" to the US economy as it launched a fresh attempt to lower borrowing costs by replacing short-term debt with longer-term Treasury bonds. The Dow dropped 284 points or 2.49% as a 4:3 vote highlighted deep divisions over policy within the Fed and investors questioned the likely impact of the program. The S&P 500 lost 2.94% and the Nasdaq 2.01%.
"The message is there's not a lot the Fed can do," the chief investment strategist at Wells Capital Management in the US told Bloomberg. "Whatever they are going to do to help is already there. We've got tons of liquidity. Then, what's left is the impression that the Fed is scared about the global economy."
Financial stocks tumbled after debt downgrades for Bank of America and Wells Fargo, sending the S&P Bank Index down 4.8% for the night. Energy stocks also fell sharply as sectors exposed to the global economy sold off. Tech stocks and defensive sectors such as utilities fared better than most but still lost ground.
Earlier, stocks had briefly turned positive after an unexpectedly strong rise in home sales. Sales of "existing homes" improved 7.7% to a five-month high last month.
A sharp rally in the US dollar to a seven-month high sucked cash out of alternative investments, including oil and precious metals. The dollar index was lately up more than 1%. The Australian dollar collapsed more than two cents to near-parity. The Aussie was recently buying US$1.005.
Oil rallied following a substantial fall in US inventories but turned south as the Fed's economic outlook underlined demand concerns. Crude for November delivery was recently down $2.17 or 2.5% at US$84.78 a barrel.
Precious metals reversed earlier rallies as the resurgent greenback undermined demand for hedges. Gold for December delivery fell $25.10 or 1.4% to US$1,783.30 an ounce. December silver lost 42 cents or 1% at US$39.72 an ounce.
US copper sagged back to Tuesday's nine-month low despite modest gains in London trade. December copper in the US was lately off 3 cents or 0.7% at US$3.70 a pound. Earlier in London, copper added 0.4% and aluminium 0.2%. Lead fell 3.45%, nickel 2.9% and tin 2.9%. Zinc was near flat.
"The reason the [copper] market is selling off is that continued strong language of economic slowdown," the vice president for Great Pacific Wealth Management in the US told Reuters. "If we are to have slower markets and slower growth, that does not bode well for copper."
The major European markets closed lower ahead of the Fed announcement as they reacted with disappointment to yesterday's news of delays to Greece's latest aid instalment. Britain's FTSE 1.4%, Germany's DAX 2.47% and France's CAC 1.62%.
TRADING THEMES TODAY
TESTING THE LOWS: A grim session overseas suggests the ASX is about to test the Sep 14 support at around 4000 and most likely the Aug 8 closing low at 3986. US investors have been waiting for the cavalry to arrive in the form of the Fed, and when the cavalry came over the hill they were arguing amongst themselves, sounding scared and had only one 50-year-old bullet left in the arsenal. Gulp. There are no obvious havens today but as usual in times of fear, defensive sectors should get off lighter than cyclicals. BHP fell 4.8% in US trade, Rio Tinto 6.3% and Alumina 6.2%. Precious metals would normally be an option but the US dollar charged as investors liquidated so-called "risk assets".
CHINESE MANUFACTURING: One beacon of hope for our market this morning might be the release of the Chinese manufacturing purchasing managers' index at 12.30pm AEST. This HSBC index contracted for two months but showed a significant improvement in August to 49.8, just under the 50-point level that separates contraction from expansion. If the index has inched back into expansion, it could give our market a leg-up today. If!
ECONOMIC NEWS: No major scheduled domestic news today. Tonight's schedule in the US includes weekly unemployment claims, leading index, house price index and natural gas storage.
