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Wall Street’s worst night since May looks set to drive Australian stocks to four-month lows.

Investors face more pain following yesterday’s 2.1 per cent sell-off on the S&P/ASX 200. A day after the local market’s heaviest fall since February, ASX futures skidded 98 points or 1.36 per cent.

Contagion fears over a Chinese property meltdown fuelled heavy selling on equity and commodity markets. The Dow lost 600 points. The Nasdaq and several European markets shed more than 2 per cent.

Iron ore sank to a 16-month low. Copper shed 3 per cent and oil almost 2 per cent.

Wall Street

A “risk-off” session saw the S&P 500 record its worst loss since May. The US benchmark shed 75 points or 1.7 per cent, with all 11 sectors declining. Wall Street’s fear gauge, the VIX, jumped almost 25 per cent to its highest since May.

The Dow Jones Industrial Average tumbled 614 points or 1.78 per cent. The Nasdaq Composite gave up 330 points or 2.19 per cent. A small final-hour bounce protected the indices from even deeper falls.

A liquidity crisis in China triggered heavy losses in Asia yesterday, which continued into Europe and on to the US. Hong Kong’s Hang Seng index dived 3.3 per cent to a 12-month low as China’s second-largest property group moved closer to defaulting on its debt.

Evergrande Group fell as much as 17 per cent, dragging other property stocks with it. The property giant has more than US$300 billion in liabilities and is expected to miss a payment deadline on Thursday.

Other reasons for the overnight weakness included seasonal factors (September is historically the weakest month of the year in the US), caution ahead of this week’s two-day Federal Reserve policy meeting, stubbornly high Covid cases and tensions in Washington over an infrastructure spending bill and an approaching debt ceiling.

Last night’s sell-off briefly dragged the S&P 500 more than 5 per cent from its peak for the first time in almost 11 months. However, bearish predictions of a ten per cent market correction have been so far undone by rebounds. The index finished 4.1 per cent off its September 2 record as dip-buyers entered the market in the final hour of trade.

“We’re due for a correction,” Jake Dollarhide, CEO of Longbow Asset Management, told Reuters. “It’s like the market is addicted to buying the dip. Every time it goes down 5% or 6%, all this liquidity jumps in to prop us back up.”

A retreat to safety drove bond prices up and yields down. Bank stocks, which benefit from higher rates, retreated. Bank of America shed 3.43 per cent, Goldman Sachs 3.41 per cent and JPMorgan Chase 2.99 per cent

Australian outlook

A big test coming up for the investment community’s willingness to “buy the dip”. The local market yesterday pre-empted at least some of the overnight weakness, suggesting an opportunity this morning if the market opens as weak as futures action suggests.

The ASX 200 is moving swiftly towards correction territory. The index finished yesterday’s session almost 5 per cent off its peak, and will open today at least 6 per cent off last month’s high.

“Buy the dip” has been the investor’s mantra since the pandemic low last March. However, traders may prefer to see how this week’s two risk events play out: the US Fed’s taper decision and a possible Evergrande default (an event some analysts are calling a potential China “Lehman Brothers moment”).

All 11 US sectors declined. Bond proxies fared best – or perhaps, least worst – as yields declined. Utilities eased 0.21 per cent, real estate 0.63 per cent and health 0.98 per cent.

Cyclical sectors took the biggest hit. The energy sector tumbled 3.04 per cent, consumer discretionary 2.37 per cent, financials 2.22 per cent and materials 1.94 per cent.

The RBA releases the minutes from this month’s policy meeting at 11.30 am AEST. Also due: weekly consumer sentiment data. Qube and Milton Corporation trade ex-dividend.

Mainland Chinese markets will remain closed for a public holiday.

The dollar declined 0.15 per cent to 72.52 US cents.

Commodities

The potential collapse of China’s second-largest property group undercut demand for raw materials. The spot price for iron ore landed in China sank US$6.80 or 6.7 per cent to a 16-month low of US$94 a tonne. US copper dropped 3.1 per cent to US$4.115 a pound.

Phil Flynn, senior market analyst at The Price Futures Group, said Evergrande’s woes were “raising concerns about a bigger economic crisis in China that could put downward pressure on a lot of the commodities that China consumes”.

“If Evergrande were to completely collapse, the supply and demand equation in the metals market could be whiplashed into a strong imbalance that favours the bears — never mind the potential for additional defaults,” Adam Koos, president at Libertas Wealth Management Group, told MarketWatch.

On the London Metal Exchange, copper fell 2.8 per cent to US$9,049.15 a tonne. Aluminium lost 0.9 per cent, nickel 1.6 per cent, lead 1 per cent, zinc 2.5 per cent and tin 0.7 per cent.

BHP‘s US-listed stock dropped 2.7 per cent and its UK-listed stock 1.6 per cent. Rio Tinto shed 2.9 per cent in the US and 2.39 per cent in the UK.

Oil joined a general retreat from risk. Brent crude settled US$1.42 or 1.9 per cent lower at US$73.92 a barrel.

Gold, a traditional haven in times of market stress, climbed for the first time in four sessions. Gold for December delivery settled US$12.40 or 0.7 per cent ahead at US$1,763.80 an ounce. The NYSE Arca Gold Bugs Index dipped 0.37 per cent.

Last week’s fierce rally in US uranium stocks soured. Denison Mines dived 12.42 per cent, NexGen Energy 11.56 per cent, Uranium Energy 7.72 per cent and Cameco 5.12 per cent.  

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