I know, the US and European markets staged a monster rally Friday, to (partly or totally) offset the collapse or heavy losses acquired during the week. Yesterday’s performance varies with peripheral nations mostly being unable to recover most of the weekly losses.
Such massive short covering represents a Pavlovian response that has been instigated by hints of S-T-I-M-U-L-U-S by St. Louis Federal Reserve James Bullard along with ECB’s Benoit Coeure in the wake of the current stock market meltdown.
In the US, note of the interesting evolving divergence between the small caps and the broad market. Such divergence has been a three day affair where small caps rallied as broadbased markets wilted. Friday, the Russell 2000 sold off modestly in the face of a largely broad market melt UP.
Heightened volatility has been the order of the season.
We have seen a similar sharp upside move last October 8th as US markets celebrated the Fed’s minutes suggesting the extension of low interest rates regime and a talk down the US dollar. This party turned out to be a one day event as all the gains had been entirely neutralized the following day. So current developments will highlight continued steep volatility in both directions with a possible downside bias. Will the oversold bounce gain momentum? Or will it fade? Will the October 8-9 episode repeat?
Friday’s oversold rally will most likely diffuse to Asia on Monday at least in the early showing. But again its sustainability will remain an open question.
Regardless of this, well, it has less publicly recognized that the current stock market volatility has smacked Asia as well.
After popping above the December 2013 highs last September, the Japan's Nikkei 255 has followed the sharp volatility of the equity bellwethers of her developed economy contemporaries.
And as of Friday, the Nikkei has been down 11.1% and seem on path to approach on the psychological threshold of 14,000.
Notice too that the Nikkei has failed to materially breach the previous highs which makes for a seeming bearish double top formation.
Meanwhile in the Pacific, Australia’s All Ordinaries index has fallen markedly from her record highs.
From the peak, the Aussie benchmark has lost 8.9% but has rallied substantially this week to close the gap to only 7%.
During the June 2013 Taper Tantrum, the AORD retrenched by 10.6% before recovering.
Back to East Asia. Taiwan’s equity benchmark (upper window) has been reeling off the recent highs. The TWII has been down 10.5% which incidentally has signified larger losses than the June 2013 Taper at 8.8%.
Meanwhile Hong Kong’s Hang Seng Index (lower window) has given back 9.3% of her earlier gains, but this week’s partial rally which recovered some of her losses has closed the gap marginally to only 9%.
In early 2013, the Hang Seng approached the bear market nexus with a loss of 16.3%, much of this has been from the Taper Tantrum
South Korea’s KOSPI (upper window) has also been under pressure. Following the August highs, the KOSPI has retreated to yield a negative 8.7% as of Friday’s close.
During January to July 2013 which included the taper tantrum, the Kospi lost 12.19% before regaining lost ground.
Singapore’s STI (lower pane) has likewise been weakening. The STI has fumbled 5.54% from July 2014 highs.
The 2013 Taper Tantrum hit the STI pretty hard. The initial impact was a loss of 11% followed by an additional 3.3% for a total loss of 14.3% through February 2014.
The recent rally in the STI has failed to reach June 2013 highs, but once again we seem to be seeing signs of a meaningful downdraft in motion for the STI.
In the lens of the ASEAN majors.
The charts of Thailand’s SETI (upper window) and the Philippine Phisix (lower pane) seem like identical twins or appear almost interchangeable. The difference has been that the Phisix has recently surpassed the milestone 7,400 highs as against the SETI which has yet to make such an attempt. Nonetheless both have been down 4.5% and 4.7% respectively
Charts above are from stockcharts.com
Finally, Malaysia’s KLSE (top pane) has also been exhibiting signs of infirmity as the benchmark has been down 4.8% from record highs.
In one of the rare instance, the Bursa Malaysia has essentially been unscathed by the June 2013 taper tantrum. But not today, where the KLSE seem to have inflected earlier than her peers.
In the meantime, Indonesia’s JCI (bottom pane) has been ASEAN’s best strong performer over the week up by 1.3% which partly has reduced the recent losses.
The JCI recently bested its own June 2013 highs last month (September 2014) by a small margin but nonetheless failed to hold on to the hallowed ground.
Nonetheless the JCI remains 4.1% off the recent landmark highs.
The JCI, like the Nikkei and the Phisix has made recent attempts to exceed their recent highs only to fallback.
More important feedbacks from these developments.
In June 2013, benchmarks of ASEAN or emerging Asia mostly reacted violently to the prospects of the Taper. Most of developed nations were relatively lesser affected.
Today, as the Fed's Taper has become a reality, Developed Asia has apparently borne the brunt of the selling pressures relative to emerging Asia. Apparently, this has been due to the stronger US dollar which has affected the relatively more export dependent nations. The cascade in the JP Morgan Bloomberg Asia-US dollar index (ADXY) seem to reflect on such dynamic.
Also the degree of response differs.
In June 2013, Developed Asia’s drastic response has equally been met by dramatic recoveries. For emerging Asia, the recovery has been gradual and only picked up speed during the second quarter of 2014.
So a divergence developed, emerging Asia’s belated ferocious rally came in the face where developed Asia began to reveal signs of stock market strains as the US dollar gained momentum against the region's currencies.
Developed Asia’s weakness has been reinforced by the US. Since the US has been de facto leader of the world, in terms of central bank sponsored debt financed asset inflation, the recent tremors in her booming overextended and overvalued stock markets has spread to cover most of the major world equity benchmarks. Such strains seems to have diffused to Asia’s high flyers which aside from ASEAN, includes the New Zealand (NZ50), India (SENSEX) and even Vietnam (Ho Chi Minh).
So divergences seem as transitioning into convergence.
As one would note, initial pressures surfaced on Emerging Markets (June 2013), then this spread to Developed Markets (revealed by divergent market internals), and now a seeming convergence (both developed and emerging markets)—the periphery to the core dynamic.
The feedback from such phenomenon loops in a two way transmission mechanism. If the downside volatility will continue to reassert its presence in the stock markets of developed economies led by the US, then this should reinforce the current convergence downhill trend in Asia and in emerging markets. And pressures on Asia and EM markets will likewise reverberate on Developed Markets.
The persistence of such trend will eventually extrapolate to a grizzly bear market for global stocks, a world recession and a global financial crisis.
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