Overseas markets continue to fall, futures down 36 points

In what resembled the start of the ‘tech wreck’ after the dotcom bubble burst some 20 years ago, the NASDAQ crashed from more than 12,000 points on Wednesday to less than 11,000 points on Friday. After discussing for some weeks the seemingly unjustifiable extent of gains in the tech sector, the pullback that occurred towards the end of last week was inevitable.

The Australian market responded in similar fashion to Thursday night’s meltdown in the US with the S&P/ASX 200 Information Technology index (XIJ) falling more than 100 points or roughly 6% to close at 1736 points.

The broader S&P/ASX 200 index (XJO) fell 187 points or 3% to close at 5926 points.

Market darlings that were dumped unceremoniously included Afterpay (ASX: APT), Xero (ASX: XRO), Wisetech (ASX: WTC) and Appen (ASX: APX).

Buy now, pay later stock Sezzle (ASX:SZL) which was attempting to ride on the coattails of Afterpay has been smashed in the last week, falling from $11.34 to Friday’s close of $7.65.

Based on its share price of 37 cents in March, Sezzle transformed into a 30-bagger in less than six months, but as the old saying goes ‘if it sounds too good to be true, it usually is’.

The biotech sector was also sold down heavily along with some of the big banks and miners, suggesting our market may be on the verge of a reality check as investors finally acknowledge the economic implications of COVID.

Overseas markets continued to tumble on Friday night after the ASX closed, and with the SPI200 futures index down 36 points to 5875 points it would appear that there are further losses on the horizon.

It is worth noting that the sharp decline in US markets on Thursday and Friday followed the S&P 500 and the NASDAQ hitting all-time highs on Wednesday and the Dow drawing very close to matching its all-time high struck in February.

Consequently, there is no debate over whether we have experienced a bubble, it is now case of whether it will quickly burst or slowly deflate as equilibrium returns.

The upcoming presidential election will create broader uncertainty, and of course October is always a jittery month being the anniversary of so many big crashes.

Conversely, the other school of thought is that sustained low interest rates due to fiscal stimulus will continue to place a lid on interest rates, effectively driving funds into equities where better returns are available.

My guess is that the money taken off the table last week is likely to stay on the side lines at least until after the election with the likelihood of more investors taking the same cautious approach in coming months.

If this is the case, Australian investors could see short-term pain before the potential to snare stocks at opportunistic prices when the ASX gains stability towards the end of the year, a time when we are also going to be better positioned to assess the real implications COVID has had on consumers, businesses and the country’s economy.

Where are overseas markets heading

Looking briefly at how the various regions responded on Friday, falls in the Asia-Pacific region were much more measured than Australia with the Hang Seng the worst affected as it declined 312 points or 1.2% to close at 24,695 points.

European markets haven’t fared too badly with the FTSE 100 down about 200 points on a week on week basis, closing at 5800 points on Friday.

Across the channel, it was Germany that felt the pinch with the DAX falling from about 13,400 points on Thursday to close at 12,842 points on Friday.

However, just as the US has run the hardest in recent months it delivered the biggest falls with the highflying NASDAQ index crashing from more than 12,000 points prior to markets opening on Thursday to hit 10,875 points on Friday before recovering some of the lost ground later in the day to close at 11,313 points.

Because of the company representation in the S&P 500 index, it should exhibit more resilience but the index fell nearly 7% from 3588 points to 3351 points before closing at 3427 points.

The Brent Crude Oil Continuous Contract fell with the broader market coming off its mid-week high of about US$46 per barrel to close at US$42.66 per barrel.

Despite the uncertainty, there was little movement in the gold price towards the end of the week as it traded around the US$1940 per ounce mark on Thursday and Friday.

The iron ore price was only marginally affected as it continued to hold just below US$130 per tonne.

Base metals finished the week on a positive note with copper being the standout performer as it hit a new long-term high of US$3.07 per pound.

The Australian dollar finished the week just shy of US$0.73, down about 1.3% on a week on week basis.