Volatility and uncertainty abound

Today looks like one of those days when anything could happen on markets.

Strong downward momentum on international equity markets has led to another weak opening this morning. However, an overnight rally in commodities has seen a relatively steady open in the materials sector meaning that there may need to be heavy selling in other parts of the market, especially the banks, to sustain even larger declines in the index by the end of the trading day. Given the improved value that’s recently opened up in domestic companies, it’s not beyond the bounds of possibility that bargain hunting could actually see early losses in the ASX 200 index pared by the end of the trading day.

Much of the recent de-risking in markets has focussed on emerging markets and China in particular. This means that both the Flash Manufacturing PMI and China’s stock market may hold the key to how the market finishes today. Markets are currently expecting a modest improvement in the PMI so any weakness could fuel ongoing concerns about the state of the economy. This scenario could see the materials sector join other sectors in pushing the index lower.

Recent weakness in China’s stock market has seen it approach support levels around 3500 in the Shanghai Composite Index. If authorities allow this support to be breached, it’s likely to be taken as a negative for markets already on edge about the situation in China.

David Knox’s departure as CEO of Santos adds an element of uncertainty to a situation where investors are already concerned about potential pressure on the company’s balance sheet. Markets are likely to remain nervous about the need to raise capital unless and until the company comes up with strategies that unambiguously put it in a position to weather a scenario where oil prices fall significantly from current levels.

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