Australian sharemarket at six month low, as analysts predict three months of volatility

The Australian sharemarket suffered its greatest hit in six months yesterday, with $28 billion wiped off the market by close.

Investors were responding to a sharp fall on Wall Street the day before, as manufacturing data was weaker than expected.

The S&P/ASX200 benchmark ended the day down 90.80 points, losing 1.75% to 5,097.10.

The banking and mining sectors were particularly hard hit, with BHP Billiton shares dropping 2.58% to $35.50, ANZ stocks going down 1.78% to $29.30 and NAB shares closing 2.41% lower at $32.29.

IG Markets market strategist Evan Lucas told SmartCompany several events took place yesterday which caused the share market’s slide.

“There are simmering ideas and concerns about the emerging markets and the United States has had the worst start to February since 1933,” he says.

“People are also asking questions about China as they’re currently having Chinese New Year. Because of this, the market was taking its leads from the US and Europe predominantly, rather than Asia.”

Evans says there was also some pessimism because of the RBA’s decision to keep the official cash rate on hold at 2.5% yesterday.

“The RBA has moved to as much of a neutral stance as you can get. The RBA is unlikely to ease anytime soon, so all of this culminated in what we saw yesterday in the stock market,” he says.

On Monday Wall St stocks had their worst day since June 2013. The Dow Jones Industrial Average dropped 326.05 points, down 2.08% to 15,372.80.

NASDAQ also posted losses, falling 2.61%, down 106.92 points to 3996.96.

Invast Securities chief market analyst Peter Esho told SmartCompany investors shouldn’t be fearful of yesterday’s falls.

“The US markets rallied very hard in 2013. They hit very high levels which are perhaps unsustainable, so this is an orderly correction. It’s not a situation of panic or fear yet,” he says.

“I think there is possibly another downside potential in the Dow Jones, but I think the most interesting feature for the Australian market is we have a sense of support coming in around the 5000 level.”

Esho says even if the US markets slip further, he doubts the S&P/ASX200 will fall below 5000.

“If the US markets fall further we’ll have contained losses. We’re not completely reliant on the US, but because of our proximity to Asia’s emerging markets and we’re still seen as being exposed to commodities, we’ll continue to have volatility.”

The trouble in emerging markets, like those seen throughout Asia, has impacted many developed markets and caused some steep selling recently.

Earlier this week emerging markets fell to a five-month low as a result of a slowdown in manufacturing in China and fears global growth will falter.

The MSCI Emerging Markets index dropped 1.1% on Monday to 926.74, its lowest value since August last year.

Lucas says the upcoming Australian earnings season will dictate the direction of the ASX.

“We’ve already had JB Hi-Fi’s results which were as expected. Judging on the US earning season which is almost finished, companies have beaten analysts on the earnings line 78% of the time,” he says.

“This is higher than the normal percentage of 68-70%. But in the materials sector only 33% of companies have been on the revenue line, which suggests revenue remains under pressure and this will impact Australia.”

Evans says overall the earning season should be better than predicted which will boost the market, but concerns will remain.

“We will continue to have pessimism about emerging markets, China’s growth and US tapering… the only winner out of this is volatility.”

Since January 24, market volatility has jumped 64%, however this number can change easily.

“For the year, the market’s pattern is hard to call but over the next three months volatility will remain. We’ll get retrospective China data, which has to filter out because of the New Year. Seasonality suggests between February and March it’s always a poor time for China data because of the New Year,” he says.

“This will make the market nervous again, but it’s more likely just to be a reflection of the month.”

Esho says the most important figures for the ASX will be Australian job numbers.

“Job numbers and the corporate reporting season will see the movement in the market,” he says.

“I’m expecting some surprises in the mining space. I think they might report better than expected earnings, only because the currency has been working in their favour and they’ve been cutting costs.”