Someone stepped calmly into the market yesterday during the middle of a rout and bought. It must have been a big bid. We’ve never quite seen a chart pattern like it, where an entire index turns on a dime and replaces a steep fall with an equally steep ascent. What happened?
The story from the ASX is that a computer glitch caused trading in the futures market to be suspended for just over an hour in the middle of the day. Unable to hedge positions in the futures market, we are told, investors sold shares. And boy did they. Shares shed about AU$36 billion in market capitalisation before the glitch was fixed.
The fix – of the glitch – came in just as the ASX/200 declined to 5,500. That happened to coincide with the long-term level of technical support the index has enjoyed since beginning its fabulous run in 2003. If you drew a line connecting all the market lows from 2003 until yesterday, it would lead you right to the 5,500 level.
Is that it? It’s been no small correction, wiping some AU$80 billion in market value away and resulting in an 11% decline from the highs. It’s a massive correction. But it certainly doesn’t qualify as a crash. A crash is more in the order of a 20-30% decline in markets. That remains a possibility as long as markets are in the dark over who has the most exposure to asset-backed debt.
“You work in finance,” our barista reminded us this morning.
“What’s going on?”
“The price of money is going up. The value of IOUs is going down. The value of everything else is in flux.”
“Oh. One sugar or two.”
“Better make it two.”
We didn’t have time for a more complicated explanation. But that explanation will do. “Risk is being repriced,” is one way of saying it. But it’s simpler to say the market price of money is going up. Non-bank lenders are going out of business, having made many bad loans. The remaining lenders have closed their wallets, barred the door, battened the hatches, and set the moat on fire with boiled oil.
The Daily Reckoning Australia