IG Markets Afternoon thoughts

Good afternoon,

Across Asia, regional markets are getting hammered after the plunge that was seen in world markets overnight. Participants are becoming very fearful of a global economic slowdown, led by the likes of Europe and the US as they succumb to their enormously high debt levels. The Hang Seng is the worst performer, down 4.9% while the Nikkei 225, Kospi and Shanghai Composite are all down between 1.9% and 3.6%.

In Australia, the ASX 200 is currently 39% weaker at 4110, having earlier traded to a low of 4087. You can’t say much other than it’s been a bloodbath today. It seems all the fear and anxiety over the spreading of the European debt crisis to the larger nations of Italy and Spain, along with the dismal structural state of the US economy, collided last night with the result being a global equities rout.

Losses today have been indiscriminate. Nothing has been spared with all sectors down between 2.5% and 5.5%. The big question on everyone’s mind is what will happen across European and US markets tonight and will there be any form of emergency policy response?

For the first time since the GFC, we’re seeing genuine fear and panic rippling through global markets again. Anyone who says they know where these markets are going is kidding themselves; this rout could end next week or in six months time, no one really knows. Whilst it appears the world is in a much healthier position than it was in early 2008, the situation could continue to deteriorate rapidly Remember when everyone was telling us that the subprime mortgage crisis was all contained in the first few months of 2008? Just like the European crisis appears contained at the moment

I think markets are finally starting to realise that there simply isn’t an easy way to recover from the mess that developed nations have got themselves into over the last five years. They are starting to realise that the never ending cycle of trying to kick-start growth with more debt just isn’t working and that its going to take a longer period of time and pain for these debt issues to slowly work their way through the system.

There’s no doubting that stocks are cheap on all sorts of metrics and that there are exceptionally attractive yield plays out there. However, this doesn’t mean anything in a market that doesn’t care about fundamentals; it’s been driven by fear and panic. The market may begin to look at fundamentals next week or next year. Nobody knows. Just remember the market can stay irrational a lot longer than you can stay solvent.

Capital preservation is the name of the game. Unless you can genuinely say that you are buying with a five year time horizon, I’d recommend being very careful trying to catch falling knives in this market, especially when using leverage. When it comes to market trends, they always tend to continue for a lot longer than people think possible, both to the upside and downside. It takes an enormous amount of energy for a trend to reverse. The problems that are plaguing traders’ minds at the moment aren’t suddenly going to disappear overnight; the US or Europe aren’t going to wake up tomorrow and see that all their debt has been paid down.

During times like these there is a lot to be said for trading the broader indices rather than trying to pick individual stocks; there’s is no doubting that the index will eventually recover but everyone remembers the days when Bear Sterns and Lehman Brother’s disappeared from the map. Then there’s always the option of hedging part or all of your portfolio to ride out the volatility. You don’t need to pick the absolute lows or highs to make money in the market. You simply need to ensure that you live to fight another day rather than hoping and praying it will rebound. Markets generally go up the stairs and down the elevator shaft, referring to how long it takes to recover big losses.

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