Global markets were sharply lower overnight, with the US market (S&P 500 index -1.7%) down, although it was ~3% lower before recovering partially late in the session.
There have been several emerging risks for the market and a number of reasons for the recent sell-off cited:
- Investors fear a contagion sweeping financial markets from the troubled China property market. Hong Kong equities saw (Hang Seng, fell -3.3%) a big sell-off during the Asia trading session on Monday as embattled developer China Evergrande Group is on the brink of default ahead of it bond payments deadline later this week.
- The US Federal Reserve began a two-day meeting and investors are worried the central bank will signal it’s ready to start pulling away monetary stimulus amid surging inflation and improvement in the jobs market.
- COVID cases are rising given the delta variant and remain at January levels as colder weather approaches in North America.
- Investors are also concerned about brinkmanship in DC as the deadline to raise the debt ceiling approaches. Congress returned to Washington from recess rushing to pass funding bills to avoid a government shutdown.
- September has the worst track record of any month, averaging a 0.4% decline, history shows the selling tends to pick up in the back half of the month – with the current selling possibly more intensified given the markets strong rally year to date (heading into September).
All sectors were in the red in a broad based sell-off, with stocks linked to global growth leading losses Energy and Financials were the hit hardest stocks. Most of the mega cap tech names were also weaker, dragging the tech heavy Nasdaq index lower. In a sea of red, American Airlines were higher after US announced it has relaxed travel restrictions for vaccinated passengers from several countries.
European Markets were down overnight (Stoxx 600 index, -1.7%), as banking stocks tanked amidst fears of an Evergrande group default. Mining stocks were also weaker as commodity prices continue to slide, while travel and leisure stocks were higher following US relaxing travel restrictions.
It is hard to pinpoint and exact for the sell-off, but we think a market retracement is quite normal post such a strong rally. At this stage, we do not see a global financial issue stemming from the China situation, but it will be largely dependent on how bad Chinese authorities let things get. Our view is there could be a buying opportunity in the near term as China related developments unfold.
BHP (BHP:ASX)
Aussie mining giant BHP shares have been on a sharp 2-month slide, as iron ore prices plummet amidst weakness in demand from China stemmed for a number of reasons, which see the commodity trading at half of its record highs of US$222/tonne hit in July.
It appears to boil down to steel production curbs imposed from the worlds biggest steelmaker, China, that started back in 2020 and have continued to date. There are a number of instigators of this policy, most notably to curb CO2 emissions. However, the most recent down step in production came from a sharp downturn in the Chinese property sector (including the largest property developer Evergrande facing a default on its US$300 billion in debt), which has negative flow through implications for steel demand.
The shares face heavy pressure which uncertainty over iron ore demand and sentiment over the near term. For investors wanting exposure to the sector we still rate BHP due to its scale of operation and low-cost basis to generate strong profits and healthy dividends (which direct link to commodity prices). But for the mean time would exercise caution in this dip until we see a certainty as to where iron prices will bottom out to establish a better entry point for new investors.
Australia & New Zealand Market Movers
The Australian market down heavily yesterday (ASX 200 index -2.1%), as a plunge in iron ore prices dragged mining stocks lower, coupled with economic unease in China and markets trading nervously ahead of a big week for central banks.
Iron ore price dived another –11.5% on Monday sending iron ore miners lowering continuing their almost 2-month slide, BHP (-4.2%), Rio Tinto fell (-3.6%), Forsetcue (-3.7%) and Champion Iron (-12.3%). Other miners were also lower as weak sentiment spread across the market Lithium miner Orcobre plummeting -8.7% and Rare Earth miner Lynas taking heavy losses down -11.8%.
Technology stocks were also another major victim threatened by tightening monetary policy. While the big four banks were all down about ~2% and the Australian economy is linked to strong performance of the mining sector, CBA estimating every US$10 decline in iron ore price equates to $6.5 billion loss in nominal GDP for the Australian economy.
The New Zealand market was lower on Monday (NZX 50 index, -0.4%) avoiding a harsh sell off felt globally.
Mainfreight shares slipped -0.4% following its founder and director Bruce Plested sold around $4.3m shares (which is a tiny fraction of his total holdings amounting to $1.4 billion). Freightways was also down -0.3% and Move Logistics fell -3.9% after telling investors it had taken a hit from ongoing lockdown restrictions in Auckland
3 Things Markets will be Watching this Week
- The key global events this week will be the US Fed meeting on Wednesday.
- RBNZ Assistant Governor Hawkesby’s speech as the market considers whether there will be a 0.25% or 0.5% hike at the October 6 RBNZ meeting
- Kathmandu’s annual result, AGM’S held by AGL Energy, Mercury and Stride Property and COVID and lockdown updates both sides of the Tasman.
