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IG Markets Afternoon thoughts

IG Markets afternoon thoughts

Across Asia, regional markets are mostly lower following the very heavy falls in the US overnight as participants worry about the state of economic growth in the US. The Kospi is the worst performer, down 2.8% while the Hang Seng and Nikkei 225 are down 1.9% and 2.1% respectively. The Shanghai Composite is beating to its own drum once again, currently up 0.1%.

In Australia, the ASX 200 is currently 21% weaker at 4342, having earlier traded down to a low of 4326. Equity markets are being smashed at the moment as investors continue to bail out of risk assets, fretting over the woeful state of the US economy and the seeming lack of a coordinated plan to rectify its many structural problems. The local market’s losses are both heavy and broad based with the consumer discretionary, materials, energy, industrials and financial sectors all seeing declines of more than 2%. The benchmark index is now trading at its lowest levels in nearly 12 months.

The markets really getting hit from all angles; on top of all of the domestic issues weighing on the market you have these huge global concerns, which are causing a lot of volatility at the moment. The recent falls in global equity markets are making headlines everywhere. As I write, the top article on the front page of The Age online reads ‘$30bn lost within minutes’.

From a contrarian point of view, it looks like we’re getting close to a short-term bottom; it looks like the market has just reacted too negatively to the recent weak US data. The stock market is a leading indicator so all these headlines, be it in newspapers or on the news tonight are already factored into current prices. I think we’re getting to a point where expectations are just getting too bearish; it’s at these extreme points in sentiment where market reversals usually occur, with ‘less bad’ news perhaps the catalyst. With markets in the US down seven or eight days consecutively, they’re ripe for a short-covering rally.

For example, expectations ahead of Friday’s US nonfarm payrolls data have been downgraded significantly; there will come a point where expectations will be too low. When the release actually comes out ‘not too bad’ the market will stage some sort of a relief rally.

Interestingly, from a technical perspective the S&P 500 index in the US has completed a bearish head and shoulders reversal pattern, which we talked about a few weeks ago. The break down through the neckline at 1260 last night completes the pattern, with downside targets now projected towards the 1155 level. This pattern has been forming over the last six months; generally speaking, the longer they take to form, the more significance they hold.


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