Why This Could Be The Week From Hell For the ASX

Stock market

The Aussie share market has seen better days. Yesterday was the market’s worst single day performance in over two months.

Not since early May has the ASX200 lost as much as 2.2% of its value. The All Ords didn’t fare much better. The index fell by 2.1%, closing on 5416.6 points. In total, roughly $38 billion was sold off the markets.

Among the worst hit blue chip stocks was ANZ [ASX:ANZ], which shed over a dollar. At $32.09 a share, ANZ finished 3% lower at the close of trade. The same was true of National Australia Bank [ASX:NAB], and Westpac [ASX:WBC], both of which shed 3% off their value.  

But Aussie markets weren’t the only ones to witness sharp declines. Global markets arguably saw the worst of it.

The German DAX lost 409 points yesterday, finishing on 11,083 points. Similarly, the Euro STOXX 50 index had its worst day fall since 2011, falling by 4.2%.

Over in the US, the S&P 500 and Down Jones each had their worst day since October 2014. Both indices lost roughly 2% in trading overnight.

Markets across Asia took the biggest beating. The torrid time they’ve had in recent weeks continued on Monday.

The Shanghai Composite Index shed 2.25% to start the week. The index has now lost 22% of its value since its peak in May, falling to 4,053 points.

What caused the market selloffs?

As we’ve come to expect, Greece was responsible for much of the panic across the markets. With the country set for a referendum over the bailout terms, the likelihood of a Greek default intensified over the weekend.

But it’s not so much Greek debt, or indeed the possibility of a default, that made the markets jittery. Even at $300 billion, their debts are relatively insignificant.

Instead, it was the imposition of capital controls that sparked the selloffs. The Greek government made this decision to prevent a run on the banks.

But markets don’t like capital controls. Why? Because they hold fears about what it means for global banking as a whole. In other words, the turmoil on the markets is all about bank liquidity. As Credit Suisse explains:

If you’ve got Greek banks under capital controls you have a problem with the broader banking infrastructure in the world. If you don’t know whether the Greek banks are going to be around tomorrow, then who’s exposed to them?

Broadly speaking, capital controls caused yesterday’s selloff.

But it’s equally true that the potential for a default  is adding to market fears. Markets hate nothing more than uncertainty. When they sense it, their inclination is to sell and sit idly by until it clears up. That’s especially true when banks are involved.

That’s why this week could prove to be a difficult one for global markets, including Aussie stocks. While Greece seems closer than ever to a default, the situation remains unresolved. As long as that’s the case, the markets will remain on the sidelines.

Should Aussie markets be more concerned about China?

For Australian stocks, a Greek default would be less damaging than you might think. The ASX is relatively limited in its exposure to the Greek market.

But there is something even bigger looming on the horizon that could prove more problematic than Greece.

As I mentioned above, Chinese indices are taking a battering. On top of the losses we’ve seen across the SCI, the Shenzhen ChiNext fell 8% on Monday. Since the start of June, the tech-focused index has fallen by 33%.

The only reason these selloffs aren’t more worrying is because of the rapid rise of Chinese stocks in the past year. The value of the SCI is still double what it was this time last year. And it’s roughly 700 points better off than it was in January.

Nonetheless, the downward trend remains concerning. The likelihood is that Chinese stocks will continue falling before bottoming out.

In response to this, the Chinese government announced their fourth rate cut in the past six months. The cash rate has slipped down to 4.85% — a cut of 0.25%.

Officially, the rate cut was publicised as the latest pillar of support to China’s slowing economy. Unofficially, the government and PBoC wanted to arrest the stock market’s slide. It’s true that those two aren’t mutually exclusive. They’re effectively killing two birds with one stone. But there’s no doubt that the market drops forced their hand to cut rates.

Additionally, the reserve requirement ratio was cut by 0.50% for some lenders. But neither of these measures were enough to stem the losses seen on Monday.

For Aussie markets, these developments are far more concerning than what’s happening in Greece. China’s ongoing prosperity directly influences our own fortunes. If Chinese markets continue to decline, it’ll raise fears that the economy will fall well below its targets. And if wealth creation in China appears to be slowing, then market optimism will fade away.

That, of course, bodes poorly for Australia. Anything which drags down on our export industry will lead to further selloffs on Aussie markets. Not only that, but it’ll add to the growing uncertainty surrounding the economy as a whole.

Mat Spasic,

Contributor, The Daily Reckoning

PS: The turmoil in Greece, alongside China’s stock market hiccup, is bad news for Aussie markets. What’s more, the outcome of both of these issues suggests that the ASX is in line for much bigger losses soon. At this point in time, it’s hard to remain bullish on the future of the local share market when the future looks so uncertain.

The Daily Reckoning’s Vern Gowdie sees a major correction across the ASX in the future. Vern is the award-winning Founder of the Gowdie Family Wealth advisory service. He’s been ranked as one of Australia’s Top 50 financial planners. He believes we’re set for a catastrophic crash in stocks in the future. And he thinks the ASX could lose as much as 90% of its $1.8 trillion market cap.

Vern wants to help you avoid the coming wealth destruction. That’s why He’s written ‘Five Fatal Stocks You Must Sell Now’. In this free report, he’ll show you which five blue chip Aussie companies could destroy your portfolio — and you almost certainly own one of them. To find out how to download the report, click here.

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The Daily Reckoning offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, The Daily Reckoning delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors. Founded in 1999, The Daily Reckoning is published in 7 countries with a worldwide readership of almost 1 million people.

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slewie the pi-rat
slewie the pi-rat
1 year 3 months ago
“Broadly speaking, capital controls caused yesterday’s selloff.” the capital controls went from: Emergency Liquidity ON, to: Emergency Liquidity OFF, with the Troika’s decision: “No soup for you!” i have not yet seen any estimates as to how many tens of $ Trillions were vaporized, yesterday, to teach Greece, what? a ~$2 Billion lesson? i’d like to buy those Eurocrats a Guinness. for their brilliance! listen. Greece and the IMF will either come to terms by the stroke of midnight, or they won’t. if they don’t, the Greek debt will turn back into pumpkins and mice, and then we’ll see who… Read more »
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