MARKETS SPECTATOR: Blue bourse

The S&P/ASX200 Index has fallen almost 10 per cent in US dollar terms this year as question-marks hang over the US recovery and Chinese growth forecasts.

The S&P/ASX200 Index’s 28 per cent rise from July 1 to 5220.987 on May 14 now seems a distant dream. 

This year the index is up just 2.4 per cent. In US dollar terms it has fallen 9.7 per cent, according to Bloomberg data. The Australian dollar has fallen 13 per cent to US cents 92.03 at 0859 AEST from its high this year against the US currency of $1.0575 on January 10, according to Bloomberg. 

Further falls in stock prices seem inevitable. The MSCI All-Country World Index dropped 3.6 per cent as investors fled shares in the belief the world’s two biggest economies are in trouble. Mark Sowerby, managing director of Blue Sky Alternative Investments, says stock markets have been artificially inflated by hundreds of billions of dollars in central bank bond purchases. 

The world’s largest economy, the US, is in the midst of an anaemic recovery that may not have materialised without the Federal Reserve’s $US85 billion monthly bond buying program that has ensured credit for business restructuring. Pimco founder Bill Gross told Bloomberg News he doubts the Fed “can put Humpty Dumpty back together again”.

China, the world’s second-largest economy, is slowing in the midst of questions over the health of its financial institutions, the same questions that plague Europe. China’s benchmark money-market rate has climbed to a record. Locally, Sowerby says Australian companies are hard pressed to increase price because of competition and muted economy while the ability to cuts costs are hampered by infrastructure and labour. 

In this environment volatility is the buzzword for markets. It’s a more diplomatic way of saying that markets are headed lower, perhaps for a considerable time. “Money is quickly moving in and out of anything that is liquid,” says Blue Sky’s Sowerby. “Volatility is here to stay”.

In New York trading overnight, the S&P GSCI gauge of raw materials fell 3.1 per cent. Gold dropped below US$1300 an ounce for the first time since 2010. Asian stock futures today are retreating suggesting regional share markets will extend losses.