Global Markets Overview – September 24, 2014

Global slide gathers momentum

The global slide continues - small cap equities saw sustained downward pressure and the trend is starting to spread to the large cap space as well.

There wasn't a whole lot of emphasis put on price action overnight, which I find interesting considering the momentum that is building in the US. The DOW hit the low of the day on the close, as did the S&P, and saw relatively benign trading as the bears started to take full control.

I continue to keep a sharp eye on the S&P futures, fourth days in arrow now in the red and its fallen 2.3% over this time, looking for the magical 5% pull back to signal the start of the proper slide in the large cap space.

I also found overnight trading in copper interesting. The news out of Chinayesterday was mixed: the flash PMI figures showed new orders and exports increased at a faster rate, but employment decreased at a faster rate. Commodities and equities rallied strongly on the PMI figures, from which we can draw two conclusions:

1. Manufacturing is still expanding in China and demand will return in the near term

2. The slide in employment is going to push the central government into the market with some form of stimulus package once more

Copper trading was interesting because it actually fell with both LME and CME. Copper is now heading back to yearly lows. To me, that spells trouble for yesterday's trading theories and trade action, for two reasons:

1. The flash figure was just that a flash read and the blurred story meant it was easy to cherry pick

2. China's Finance minister Lou Jiwei making it clear on Mondayat the G20 finance meeting that stimulus from the central government is now out of the question

As the clearest measure of future industrial production, the copper slide is a telling reminder that short-term volatility and downward pressure is likely over the coming months. Investors are starting to believe the PBoC and central government want structural change to take effect.

Ahead of the Australian open

The price action from yesterday illustrates that the sell-off is well and truly underway in the ASX. The bounce on the China data was hollow, and volume and value through the ASX yesterday was below the 30-day average. The recovery looked more like the bulls were trying to resist the pressure, rather than bears seeing the end of the slide.

Iron ore (IO) will again take centre stage today. The IO futures in China fell slightly yesterday, ignoring the flash data as rebar fell 1.2% - this shows steel demand is still not recovering. At $79.40 a tonne, we have now see Arrium and Mount Gibson (on UBS estimates) under water versus costs. BC Iron has 40 cents to play with if it is producing at 62% concentrate and not 58% or lower. The key risk for materials is if the biggest scalp in the pure IO space, FMG, goes under water. Costs are estimated at US$77 a tonne, giving it $2.10 to play with.

We're currently calling the ASX 200 down 37 points to 5378 as the market looks to give back most of yesterday's gains on the open. Once again, the banks will be the place to watch, considering the bounce in the index was mainly down to their recovery. The volatility here is unlikely to slow any time soon as speculation around the Fed funds rate plays havoc with the yield trade - all eyes will be back on Washington come the October Fed meeting.

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