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ASX Falls 1.9% On Worst Day Of Trading This Year

Stuart Lucy

Stuart Lucy is an Investment Specialist at the Australian Stock Report, and has gained exposure to funds management and investment banking throughout his career. He draws on this experience to provide macroeconomic commentary and actionable investment insights to clients. Stuart is responsible for writing reports, is involved in delivering Macrovue webinars and provides general advice to our members on portfolio construction. Stuart currently holds RG146 General and Securities qualifications.

The ASX fell 1.9% today, in one of the worst trading days this year. Asian markets have led the downtrend, with the Nikkei, Hang Seng and China A50 all declining more than 2%, early in the Asian trading session. An intensifying US-China trade war, political instability in Hong Kong and the potential weaponization of the Chinese Yuan are the main culprits for the recent sell-off in global markets.

ASX-fall-worst-day-of-trading-this-year

The trade war continued to weigh on sentiment, following the recent US announcement of 10% tariffs on the remaining $300bn of Chinese goods on Friday. China has responded by banning state purchasers from buying American agricultural products, a move that targets a key Trump constituency and is likely to exacerbate the Trump administration. As mentioned in the recent ASR Wealth FY20 Economic and Markets Outlook, the bilateral trade relationship accounts for less than 1% of global trade, and we are looking to fade major trade war-related market selloffs. It remains to be seen whether this selloff will culminate in a more serious market correction.

The PBOC allowed the yuan to slide below the psychological level of 7 to the US dollar, the lowest exchange rate in a decade, in an indication that the central bank is happy to weaponize the yuan to protect China’s trade surplus. Trump has previously accused China of currency manipulation in the past, and a sustained weakening of the yuan is likely to prompt a further retaliatory move from the United States. Questions are also emerging as to whether the Chinese government will tolerate more sustained yuan weakness below the 7.2-7.3 level, which is likely in the face of additional tariffs. Sustained yuan depreciation increases the local currency value of offshore debt, making it harder for local firms to service and increasing the chance of a balance of payments crisis. Chinese authorities must balance this factor with a deteriorating trade surplus in formulating currency policy.

Recent pro-democracy protests in Hong Kong have also been weighing on market sentiment around Asia. Protestors have blocked flights in the financial capital and are increasingly involved in violent clashes with police. Beijing has indicated that its tolerance for the more violent protests is reaching breaking point, although it is still unclear how far authorities will go in policing protestors in the face of international opposition. HSBC slashed full-year GDP numbers for Hong Kong to 1-1.5%, a sharp slowdown from the 3% figure reported last year.

The US reporting season has revealed results which are roughly in line with estimates, with companies that substantially beat estimates being more scarce than usual. This has weighed on sentiment because positive earnings momentum has aided the equity market rally thus far. Eyes will be on companies still due to report in the local earnings season, which is likely to provide direction to the ASX over the next few months.

 


 

Disclaimer:

This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978) (“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).

This article is provided for informational purpose only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceeding. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.

ASR has no position in any of the stocks mentioned at the time of writing.

 

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