US and European equities lower, Andrew Forrest copping heat over production cap remarks, currency markets relatively quiet, ASX futures down 43

The NASDAQ technology index sold off harder than any other major index in the US or Europe last night, falling 2.37%. This was closely followed by the Russell 2000 index of small caps, so it seems as though there was some logical selling of overvalued companies that directed the risk-off move in equities last night. Recently I wrote about the idea that, given the treatment of equity markets as sources of reliable growth and income by investors eager to move away from low cash rates, that these two indices might house value in bottom-up plays that were otherwise crowded trades in more popular indices like the Dow and S&P 500; however, this is a landscape that will suit bottom-up stock pickers and technical analysts rather than those looking to asset allocate. Last night proved that broad exposure to the NASDAQ and Russell 2000 will result in too much exposure to overpriced stocks, and that they have the propensity to fall (and admittedly rise) disproportionately with respect to the Dow and S&P 500.

I've stuck with the EURUSD for today's first chart, which shows a distinct lack of action in the euro (and thus the US dollar index) last night, relative to the volatility that we've seen over the past week. Last night was definitely an equity sell-off and didn't relate to the recent dominating theme of US dollar strength or weakness, which prompted some logical selling in markets that have run too hot for a little too long, being the US and Europe as a whole. European shares didn't get hammered too hard, it was chiefly the unexpected drop in durable goods orders in the US (-1.4% versus +0.2% expected) that set the dim mood upon the US open. In fact business sentiment data in Germany printed positively, with the business climate and business expectations components of the IFO survey beating expectations.

Andrew Forrest is copping some flack locally over his loose-lipped call for BHP, RIO & Vale to cap production of iron ore at a recent conference in Shanghai (today's AFR reports this as a follow up to previous comments). No doubt Forrest is trying to articulate a story that the Chinese will ultimately be worse off if RIO, BHP & Vale force smaller players out of business and give the Chinese fewer producers to negotiate with - and that may well be a sound theory. But the chairman of Australia's ACCC has quickly pointed out that capping production would be a brand of collusion that would constitute cartel behaviour, and I don't think he'll get any arguments there. It's not a simple situation and the pain in the short term is niggling to say the least, and devastating to the smaller producers with higher cost of production and delivery. But unfortunately the free market is going to have to work this problem out and it's going to take time.

Fortescue Metals Group (FMG) does occupy a very small component of the entire Rivkin Local model portfolio (around 1.26%) and it's going to stay there until the two Blue Chip portfolios that hold it (October 2014 and January 2015) roll in 12 months from their entry dates. Chinese growth will likely decide the fate of the stock price between now and then, and just like small oil producers in the United States right now, it's going to be a very rough ride for those who don't have the luxury of the scale that FMG, BHP, RIO and Vale do. With the benefit of hindsight I'm sure FMG would have been well advised to diversify its commodity production during times when its scrip was strong enough to pick up producers in other markets, but for now it is a concentrated iron ore producer in the rough part of a price cycle. You can see from today's second chart that FMG has been following this down cycle in iron ore prices for quite some time now, and while we can't be sure where the bottom is, we can be quite sure that our entry into FMG was closer to the bottom than the top with regard to where this stock has been in the last 12 months. She's no stunner of a holding, but the Rivkin Local Model Portfolio is performing well regardless and it will be held irrespective, given the Blue Chip Portfolio strategy is a systematic one.

Today's last chart shows the ASX 200 once again repelling from the 6,000 level - it just can't quite make it! I've plotted the 100-day simple moving average over the post-GFC recovery period and you can see that we've gotten ahead of the trend quite a bit, which--as I've said many times--has the potential to help guide us back to a 5,500-5,750 level without necessarily obstructing the broader up-trend. 

Today‚Äôs charts are taken from the Rivkin Trader platform. 30,000 global instruments available to trade including FX, commodities, index, ETFs and international shares. Trade Australian share CFDs from just $8 or 0.10%. Click here or phone 1300 748 546 to open a Rivkin Trader account now.

Upcoming economic announcements: UK retail sales out at 8:30pm, US continuing and initial jobless claims at 11:30pm, third-party US PMI at 12:45am, all Sydney time.

This article was written by Scott Schuberg, CEO of Rivkin Securities Pty Ltd. Enquiries can be made via or by phoning +612 8302 3600.

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