All eyes on Wall St as market remains jumpy over US ‘tapering’

YESTERDAY’S intraday bounce in Australian shares does not mean much. What matters right now is Wall Street.

YESTERDAY’S intraday bounce in Australian shares does not mean much. What matters right now is Wall Street, and whether or not the S&P 500 breaks major support near Friday’s low.

Australia’s S&P 500 closed down 0.6 per cent at 5155.3 points after paring a 1.3 per cent intraday fall to 515 5, a fresh eight-month low.

Iron ore miners rose strongly, with Fortescue Metals up 6.1 per cent as China’s surprisingly strong imports data boosted iron ore and steel rebar futures in China. High-yielding blue chips remained weak, with Commonwealth Bank, Westpac and Telstra down about 1 per cent.

A 0.7 per cent intraday recovery in the local share market would have been impressive if not for rapidly increasing volatility in global financial markets. At a time when big gains are met by even bigger falls, it would be dangerous to suggest the share market is building a base.

US equities are what matter now. Indeed, the broad- based S&P 500’s reaction to major technical support near Friday’s low could set the scene for the next few months. It closed Friday at 1906.13, just above the 200-day moving average at 1905.0 and the August 7 low at 1904.8.

Make no mistake, if the S&P 500 bounces strongly off 1905, it could rise to 1990 on a technical basis, about 5 per cent above last week’s low. But it would need a positive catalyst.

The alternative and more likely scenario is for a fall toward the 2007 high at 1576.9. That would be a 22 per cent fall from September’s record high of 2019.3 — not out of the question considering past reactions to quantitative easing tapering.

Investors will recall the respective 15 per cent and 20 per cent falls in global shares that occurred when the Fed withdrew the last two rounds of quantitative easing. With global asset markets again been distorted by US quantitative easing, wealth preservation through profit-taking on multi-year profits is the order of the day.

International Monetary Fund chief Christine Lagarde hit the nail on the head on Sunday when she warned that a sudden shift in sentiment could cascade around the globe.

In a market where investors are risk averse because of Fed tapering, slowing global economic growth, wars in the Ukraine and the Middle East, as well as concern about the spread of Ebola, a significant positive catalyst is probably only going to come from the major central banks.

While “QE4” or “QE Infinity” has been doing the rounds for some time, the Fed would face a massive loss of credibility if it signalled another round of bond buying just as QE finished.

China’s imports data is positive for iron ore prices and miners that have been sold excessively short by hedge funds, but one month’s trade data doesn’t signal stronger economic growth for Australia’s biggest trading partner.

Europe is now the major focus as the European Central Bank is due to start buying asset-backed securities and covered bonds from mid-October. There will be increasing calls for full quantitative easing from the ECB, and until it does, equities are likely to remain fragile.