You’re probably aware that the ASX is taking a battering today following the Fed’s sudden attack of the guilts over its free money policies.
Funnily enough, though, its utilities and materials taking the brunt of the storm:
That says to me only that there is plenty downside room for recent high-flyers to adjust over the days ahead (update: see here for the reason for weakness in materials).
The poleaxed dollar has provided little support:
It also looks poised to go lower if our macro ayletes can keep it zipped.
And there goes 5000:
Maybe this is it? A dropping dollar might provoke some interest rate talk. But we shall see over the next wee while if this sell-off turns into a global rout.
We’re due for a big global correction. Forecasters I read have been predicting it for months.
e.g. Low volume churning and HFT desperately trying to attract fresh victims at cycle highs
Art Cashin, of UBS, discusses the “positive feedback loop,” where stocks go up for no apparent reason. Cashin says his frustration is that even though the markets have punched through key levels, people haven’t come in from the sidelines.
http://video.cnbc.com/gallery/?video=3000148860
Well if they’ve been predicting it then it’s gonna happen!
Queue Swan: The high dollar has both drawbacks and benefits. Tradable sectors suffer, but the consumption industry enjoys greater purchasing power, which lifts real incomes and fosters growth.
/sarc/
If only pundits and politicians would make such statements in jest.
I’m inclined to agree with you on the AUD now, the last two lackadaisical attempts to push above 1.036 have left a lot to be desired. It’s looking weak.
It is, but everytime I have thought it was all over, the little Aussie gets some legs and bounces back.
Clearly I am lacking the understanding and conviction(not to mention pockets) to be a successful FX trader.
Might stick at mining consulting for the foreseeable future.
I keep thinking one day it will return to 0.70 USD….. hmmmm.
Yes don’t get me wrong, shorting the Aussie dollar has felt like a Sisyphean task (for me as much as anyone!) But the saviours last year were a swift rebound in iron ore spot prices, the advent of QE3, and some additional inflows in the form of CB reserve allocation.
As David has argued, the iron ore price may remain elevated, but we aren’t going to see it drive dramatically higher as we did last year (twice, albeit from overstretched lows the first time). I believe it was propelled higher in large part by a sudden withdrawal of Indian supplies. As we have seen today, the steel market in China is weakening, so we may shift now to a tapering demand scenario in iron ore.
The outlook for US monetary policy is obviously the opposite of what it was in the second half last year, so support from the USD is likely to be lacking.
Then we have the approaching Australian slowdown as mining investment winds down. If the growth story in the US holds (I believe it is not a particularly convincing one), then the reappraisal of growth trajectories could well send the AUD lower.
I’m not holding my breath for a dramatic decline, by any means, but I have brought forward my expectations of when a slow grind lower would commence. Time will tell.
I hold similar views with one small caveat – the mining effect may continue longer than expected (thinking Dalio here).
In any event, eventually the dollar resolves sans intervention.
I think it’s a problem when the market swings so fast because the real economy struggles to adapt to the changes and in fact doesn’t. We saw manufacturing been hammered, now I guess with large drops and if it continues to happen oil/petrol will go up and this will hit the purse strings. Talk about nothing been stable.
Wrong in my view. The quick adjustments in the equity market are a huge boon when compared to the painful grinding shocker of a correcting debt market. Or worse, banks.
Liquid is not always unstable.
bskerr: Please look at this 10 year chart of crude oil prices in Australian dollars.
You will note that the oil price in AUD has been lowest when the AUD has been weakest (in 2009) and highest when the AUD has been strongest. This is unsurprising given that the AUD is a proxy for commodity prices.
In addition the price at the bowser is moderated by taxes, refining costs and retail competition.
So I don’t think you can assume a weaker AUD will mean higher petrol prices (despite 3d1k’s best efforts to promote this idea)
It’s one day, sheesh! A bit early to be calling the end.
Who’s calling the end?
“ASX party ends”
Well, it did end today. Fair chance it’ll go a decent correction now but who knows?
Buy the dips!
Stairs small stepson the way up, elevator ride on the way down!
As the operator of a SME, my position is that the Aussie economy is no different to this time last year (very weak). Only now I have doubtful debts now converted into bad debts and being forced to sell stock below cost to get some cash in. The ASX will probably end mid year where was June 12.
A friend asked me the other day, ” How do I get survive at no profit?” I answered Equity Mate akka Line of Credit.
Come on guys, one days drop on the back of the FED jawboning about milkie wilkies ending.
For sure the creep back up to above 6000 will continue till such time as it all falls apart or the milkie wilkies actually stop
Dont be a lemming its all over. The big funds are selling out as the Greater Fools buy in at the top!
The Fed will never stop easing – if they do the banking system they are desperately trying to save will collapse.
Ultimately however their fiat money will be garbage either way. It’s either now or a little bit down the track (with the help of easing aka giving money to banks).
The only downside to the rally is the terrible global fundamentals. There will however still be asset price bubbles as intended by the Fed – greed will rule the roost.
Well, the fact the Fed even spoke about a pull back the markets into convulsions proves the they’re well and truly detached from reality and survive only on endless printing.
The Bear Fund worked :O (ASX:BEAR)
https://www.google.com/finance?q=asx%3Abear&ei=H68lUbjVFcatkgXCkgE
I can’t see the us picking up now until they have sorted out the automatic spending cuts due on march 1st. Plenty if uncertainty until then…
The AWE number published yesterday speaks volumes about the scale of correction yet to come in this economy.
AWE was recorded at about AUD75,000. Add on SGC and insurance charges and factor in the exchange rate and you’re looking at around USD 92-93,000 average cost/FT worker.
This is just unbelievably high. It works out around between USD45.00 and USD48.00/hr per FT employee, economy-wide. Sure, it’s less in some industries, and is distorted by very high earnings in some professions and parts of IT, mining, engineering and heavy construction.
Notwithstanding the exceptions, whichever way you look at it, costs are way out of line with competing economies. Even in low skill/low wage jobs, the real cost of employing people runs at or above USD30.00/hr. It follows there has to be a significant real cost adjustment in this economy relative to others. Since nominal earnings adjust only slowly, then real earnings will have to adjust via the exchange rate.
As I’ve remarked here in earlier posts, as the exchange rate weakens, real incomes will fall and so will real consumption, production, profits, employment and investment. Inevitably, asset markets will also fall.
The fall in tax receipts associated with these processes will also generate further exchange rate weakness, tending to discourage foreign capital inflows and feeding back into further depreciation. Depending on the reflexes of who-ever happens to govern us, falls in receipts could also drive further cuts in spending and/or increases in tax rates, further intensifying any contraction.
Such a cycle is just waiting to happen and seems almost irresistible from my perspective. Anecdotal accounts suggest this is already kicking off in even in the gas sector in WA. Demand for contractors in the maritime sector has started to tighten significantly and hire rates for small vessels and maritime services have already fallen to around break-even in some areas.
If Rio and BHP can be taken at their word, the cost-cutting in mining has also just begun.
It would be worth thinking about this situation compared with 2008/9. Then, there was a good deal of temporary adjustment to salaries and working hours – a load sharing reaction – as firms tried to absorb the shock, share the impacts of the GFC, and hoard their best employees.
Now, however, there is no expectation that the Government will come up with a fiscal package to protect domestic demand, and there is a sense that a long-term competitiveness problem needs a long-term cost-cutting remedy. So maybe this time we will see more old-style retrenchments occurring in the labour market than we saw during the GFC, and a much steeper rise in unemployment will ensue. Perhaps, as so often in the past, it will be “everyman for himself”.
In any case, once again the exchange rate is the bell-whether for this economy. It has to fall. When it happens, the descent will not be half as much fun as we might imagine.
This should be re-published tomorrow as guest post.
The adjustment post boom is likely to be of some magnitude. The economy-wide effects of the boom have been poorly understood as evidenced by the many comments over time calling for an end to boom or the more simplistic “where’s my share”.
Currency strength has cushioned us from reality. Sans boom we are no different to any other middling level economy with high private debt, fragility within the banking system and a recently bubbled property market.
I have never imagined the fall would be any fun at all.
Again I add a caveat: the timing and length of the unwinding of the boom.