ASX down, Bitcoin bounces back, global markets on knife’s edge

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The fate of the world’s markets now rest on the US debt ceiling row and Evergrande repaying its massive debt (Source: Getty)

Good morning.

ASX: The local market is set to fall at the open after a poor performance on Wall Street overnight.

This comes after the market’s 11-month winning streak was cut short as US inflation concerns, a debt ceiling row and a slowing Chinese economy weighed on confidence.

The market bounced back yesterday from two consecutive days of losses, but the gains were not enough to change the monthly result.

Wall Street: All three major Wall Street indexes ended lower and posted their worst quarters in at least 12 months following a tumultuous month.

All eyes are watching Congress to see if the US Government can agree to raise the debt ceiling to avoid economic catastrophe.

Bitcoin: Bitcoin has recovered from the Chinese crackdown earlier this week, jumping almost 6 per cent overnight.

Evergrande saga: Fears the Chinese economy could collapse have been heightened as Evergrande missed its second offshore debt payment.

The property development company, known for being the most indebted in the world, has been scrambling to meet its obligations.

The company currently owes $423 billion.

Equal pay: A new proposal has been launched to require Aussie companies to take steps to reduce the gender pay gap and report publicly on their progress.

The Global Institute for Women’s Leadership also called on the Federal Government to refuse contracts with companies that fall short of the standards.

Singles to suffer: Single Australians attempting to crack the housing market may face a tougher time if lending curbs kick in, property watchers have warned.

Soaring house prices and associated home loan values is something Treasurer Josh Frydenberg is watching.

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Why the Appen (ASX:APX) share price is falling today

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The Appen Ltd (ASX: APX) share price is sliding today, currently trading 4.58% down at $8.54.

In fact, Appen shares have been swimming in a sea of red this year to date, beginning their sharp descent in February.

Curiously, there’s been no market-sensitive news out of Appen’s camp today that might impact its share price.

So let’s take a look at what’s behind the downward pressure on the technology company’s shares lately.

What’s up with the Appen share price today?

To answer this question, we have to cover why ASX tech shares in particular have absorbed the latest tremble in global markets.

Appen shares are leading the loss for the broader sector today with the S&P/ASX 200 All Technology Index (XTX) also falling 2.6%.

The index has seen headwinds of late, spurred on by a hike in US Treasury bond yields and a corresponding rotation of capital away from high-growth tech shares.

This is important for a number of reasons.

In layman’s terms, the yield on a US government or Treasury bond (or any bond) is just the annual interest rate an investor earns after purchasing the security.

The way it works is when you buy a US Treasury bond, you are, in effect, loaning the US government a set amount of money.

In turn, the government will pay you interest at a specified yield/rate and then return your principal at a future date.

US government bonds are seen as extremely safe assets, given the unlikely odds the US government will default on its debt. So the yield on these is seen as a benchmark for other rates, also known as the ‘risk-free rate’.

This rate is essential in the financial mathematics involved with asset valuations and also has an inverse relationship with investors’ risk behaviour.

Basically, as bond yields rise, investors tend to wind back the amount of risk they have on the table and place their capital somewhere else – usually by buying ‘safer’ assets over speculative, growth-type tech shares.

One reason is that they know they can get a reasonable rate of return in more predictable asset classes.

But why else does this hurt tech shares?

The other major reason why a rise in US Treasury yields is a problem for tech shares boils down to share valuations and how the market allocates capital based on them.

When experts value an asset, such as a company’s shares, they try to forecast how much cash/return they can produce into the future and value that in today’s terms.

A part of the financial mathematics involved uses the US Treasury yield to do so.

In a nutshell, the higher the yield, the lower a share’s valuation, and vice versa.

The effect is particularly harsh on growth-type companies, given their forecasts of massive profits into the future. It also dampens the valuation of Appen’s future dividend stream.

Many tech shares – like Appen – fall into the growth category and are, thus, impacted disproportionately when these events happen. As financial theory states, this is because many assets that are ‘overvalued’ can correct down towards their ‘fair value’.

As such, investors tend to allocate their hard-earned capital towards industries, sectors and even asset classes with what they perceive as more ‘respectable’ valuations to avoid ‘catching the falling knife’.

Honing in on what’s happened recently, the yield on the 10-year US Treasury bond – the standard proxy in these calculations – has spiked lately.

On 20 September, it ticked up from 1.30% to a fresh high of 1.53% nine days later which caused a pulse through share markets these past few weeks.

It’s since crept down a fraction to 1.49%. Nonetheless, the corresponding effect has been realised in ASX tech shares and in Appen’s share price.

The Appen share price has continued to slide more than 5% since US yields made the jump. Meantime, the ASX All Technology Index has slumped 6% in this time.

This is despite no market-sensitive news from the company.

Foolish takeaway

With a rise in US Treasury yields, this tends to impact investor behaviour and hurt the valuations on high-growth tech shares.

Investors will shift their capital to more stable investments that offer a reward from the increased yield whereas share valuations are compressed if yields increase.

Appen shares have been on the down lately which appears to have been spurred by a recent rise in US Treasury yields and weakness in the broader ASX tech sector.

As it happened: ASX drops 1.1 per cent, global worries weigh on index

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A broad mix of concerns over China’s economy, rising inflation and the looming US debt ceiling sent the local market into a tailspin for the second day running as spooked investors abandoned equities.

The S&P ASX 200 index ended Wednesday’s session down 1.08 per cent at 7196 points, continuing a rout that has seen the market drop 3.1 per cent since Tuesday morning.

The ASX followed Wall Street’s worries on Wednesday. Credit:AP

A weak lead from Wall St set the scene for today’s fall, with global investors worried over the Federal Reserve’s signalling that it would start winding down its flurry of bond and mortgage purchases and look towards hiking interest rates, likely late next year.America’s debt ceiling - the point at which the country is unable to borrow any more money - was also a point of concern for investors, with Treasury Secretary Janet Yellen warning the government could run out of money to pay its bills by October 18 unless the two parties can come to an agreement over raising the limit.

These worries came in an environment of already heightened macroeconomic tensions according to Anthony Doyle, global cross asset specialist for Fidelity International, who said the recent weakness in global markets was due to a culmination of issues, each one spooking investors.

“There’s a lot of straws piling up, and it’s like investors are waiting for the one that will break the camel’s back,” he said. This includes concerns over the Evergrande property collapse in China, worries over global inflationary pressures, and the looming debt ceiling in the US and the associated debate over lifting it between Republicans and Democrats.“There’s just a lot of risk aversion about at the moment, which makes it a really tricky time in markets,” he said. Predictably, this has caused safe-haven assets such as gold rise, he said.

Gold miner St Barbara was one of the ASX’s best performers on Wednesday, posting a gain of 6.7 per cent to $1.36. Similarly, resource and energy stocks were also a rare bright spot on Wednesday, as demand from China and Europe has sent the price of coal, gas and oil skyrocketing.Blue chip stocks were some of the worst affected, with heavyweights like Commonwealth Bank (down 1.33 per cent), BHP (down 1.3 per cent) and CSL (down 2.6 per cent) all suffering falls.

Mr Doyle doesn’t expect the current uncertainty to disappear any time soon, especially as banks around the world start to prepare for interest rate hikes and the impasse over the US debt ceiling remains.

“Whilst this uncertainty exists, and until we have some certainty around the debt ceiling, I would suggest that investors, in the short term, will be on tenterhooks,” he said.

“There’s a view that the good times, in terms of equity markets, are behind us. It will start to become a lot tougher to generate those investment outcomes that we’ve experienced over the last 18 months.”

Oscar Oberg, fund manager at Wilson Asset Management, told The Age and The Sydney Morning Herald he was expecting today’s sell-off to be worse than it was, however, he also warned investors to expect choppy times ahead.

“You’d want to be positioned on the cyclical side of things, like resources and financials. It’s a very uncertain market at the moment and highly volatile.”