https://www.theaustralian.com.au/bu...s/news-story/90c5049f271053a2d1fa53be81114c92
Australian share market falls 3.7pc, well along the path towards a correction
ERIC JOHNSTON
6 hours ago.
Updated 3 minutes ago
The Australian Business Network
It’s taken just three sessions for the Australian share market to take a big step towards a correction. Bigger forces mean it might be hard for it to find its way back.
Wall Street’s selling wave continued into the Asian session, with
Australia’s benchmark S&P/ASX 200 down a whopping 3.7 per cent on Monday.
That marks the worst ASX session since May 2020, the depth of the pandemic.
There wasn’t panic selling among trading desk, but the magnitude of the fall was a surprise.
Japan’s Nikkei is so far off a thumping nearly 13 per cent, Hong Kong down more than 2.6 per cent.
Worrying, US futures are sharply weaker, with opening falls of 1.8 per cent on Wall Street’s broad S&P 500 and more than 3 per cent on the tech index Nasdaq, pointing to a rocky week ahead.
The VIX Index, the “fear gauge” of volatility, has jumped to the highest point since last year’s US regional banking crisis.
From a peak on July 10 the Nasdaq has hit a technical correction – a fall of more than 10 per cent from the peak. From Monday’s loss, Australian shares are nearly 6 per cent from their peak. Ouch.
The higher they are,
the harder the falls seems, and the latest sell-off comes after global equity markets – including Australia – have pushed fresh record highs in recent weeks.
The role of interest rates
The reality is Australia is being thumped by the global arm wrestle taking place over interest rates, and hawkish hold in rates expected by the Reserve Bank on Tuesday will do little to change momentum here.
The
sheer volume of global capital being reallocated mostly between bonds and shares and between the US and Japan, means Australian investors just need to hold on and hope.
The hits are coming from the unwinding of the carry trade, with last week’s rate hike by the Bank of Japan and bets of more hikes to come seeing money sucked out of shares there into and into bonds.
The historic shift in Japan’s outlook is clashing with the increasing view of “too little, too late” when it comes to the Federal Reserve signalling its plans for to cut US rates. What was thought unlikely a few months ago, the US could just hit the recession mark yet.
According to Matt Haupt, the lead portfolio manager for Wilson Asset Mangers Leaders, this is seeing the Japan carry trade rapidly unwinding. This is where funds have been borrowed cheaply in Japanese yen and reinvested into global shares and bonds. With rates on the rise in Japan the cash is going the other direction.
The Japanese yen, which has been extremely weak coming out of the global pandemic, was one of the strongest performing currencies in recent days, surging again on Monday.
“You got a divergence in between the Bank of Japan and the (US) Fed at the moment, so just this flow of capital, and you could see it happening last week and the mechanics were well underway,” Haupt tells The Australian.
Even when there were celebrations on the Wall Street last week when US Fed chair Jermome last signalled plans to push ahead with rate cuts, the carry trade was already starting to quietly unwind below the surface. Risky assets read tech stocks or even bitcoin are the first line to be sold off.
Weak US data
Signs of a weaker than expected US payrolls data, some earnings disappointment on the more expensive stocks such as Amazon and Intel, it was risk off.
Warren Buffett’s entry into the weekend where he sold half of his remaining holdings in magnificent seven tech play Apple added to the chill sweeping markets.
The sale of Apple and other holdings pumped up Buffett’s Berkshire Hathaway cash to a record high of $US277bn ($425bn). One of the world’s most astute investors cashing up is an ultra-conservative signal for the market.
This suggests, not only has Apple like hit the limits of its share price growth for now, but the spare cash will come in handy for a day of bargain hunting.
That day hasn’t come yet.
Events like Buffett’s sale feed into the negative market loop.
However, Haupt points, but we were already in a market where valuations were extended and crowded out in vogue.
Will ASX fall be a short term blip or the start of something bigger?
While the risk off trade is clearly on, Haupt is taking a cautious view.
For stockpickers like Haupt the next three weeks will be key with corporate Australia’s earnings season to give a real sense of where momentum is headed – as well as any pockets of pain.
For some time now, Haupt has been tweaking his portfolio towards defensive sectors, such as health care and consumer staples.
The corporate slowdown is starting to be noticeable in the US, with margins starting to be squeezed in the US with some softer commentary around consumer spending and corporate activity. Australia is usually six or months behind.
So too, Australian investors will be unforgiving on earnings misses around highest-priced stocks from Commonwealth Bank as well as discretionary retailers like JB Hi-Fi that has run hard in recent weeks.
“It’s a matter of watching the outlook commentaries if there’s a distinct slowdown in consumption,” Haupt says.
(20min delay)