MARKETS SPECTATOR: Boston securities alarm

After news hit the floor of the New York Stock Exchange that Boston had been bombed, the Dow Jones Industrial Average fell by 100 points in its last 30 minutes of trading before the closing bell stopped what would have been a massive sell off in stocks. Geopolitical risk, which has been building in recent weeks, is now once again front and center for stock market investors.

North Korea kicked it off or rather fired it off when it exploded its third nuclear bomb on February 12. But it is the US, still the epicenter for global markets, where perceived acts of terror can cause selling that will spread around the world.

It is, to use a hackneyed phrase, a 'perfect storm' for markets. Chinese economic growth, the new driver for markets, was weaker in the first quarter than hoped, 7.7 per cent versus expectations of 8 per cent. This bodes ill for Australian miners such as Rio Tinto, BHP Billiton and Fortescue Metals Group. Moreover the biggest two-day decline in the price of gold since 1983, 15 per cent to $US1,346 a troy ounce, may push down miners of the metal such as Newcrest Mining.

The Federal Reserve Bank of New York reports that US manufacturing barely expanded in April, reinforcing the perception the world’s biggest economy’s recovery is patchy at best. That’s bad for stocks with significant business in the US, James Hardie Industries and Brambles.

In Australia, news that housing finance commitments in February rose just 2 per cent reinforces a view that there is no major housing recovery and consumer confidence is brittle. Perpetual’s Matt Sherwood says the Reserve Bank of Australia can only think its glass, “a very small one”, is half full despite concerted rate cuts. The economy, outside of the mining sector, remains less than encouraging for the central bank as there is no evidence Australia’s non-mining sector can provide growth to the economy if mining slows.

With some perceiving global markets are at stretched valuations the rationale for a sell-off has been more than reinforced by the Boston bombs.