Local shares couldn't sustain the early gains with the S&P/ASX 300 (Index: ^AXKO) (ASX: XKO) falling 0.4% to close at 4,869.80 – it was the sixth consecutive fall.
For the year so far, the index is down 8.9%, and today's close was the year's low point and also a two and a half year low. So much for a Santa rally to end the year – although last year's rally also arrived quite late.
The key to whether we see any recovery will be the outcome from the US Federal Reserve meeting over the next two days and the reaction by the markets. US interest rates are widely tipped to rise, with the announcement expected following the meeting (Thursday morning Australian time).
I suspect markets are fearful that the rate rise will be large, but I wouldn't be surprised to see a very small increase in interest rates and commentary from the US Fed chair Janet Yellen that they US Fed will remain watchful of the impact of the rate rise.
Markets seem to forget that if the rate rise causes adverse consequences to the US economy, the US Fed could always lower rates again within months.
The uncertainty over whether the US Fed would raise rates appears to have exacerbated the volatility in markets, and we could see a period of calm – and possibly solid gains – once the markets and investors get used to the idea of small baby steps increases in US interest rates.
That probably won't be any consolation for resources and energy companies. BHP Billiton Limited (ASX: BHP) saw its share price fall to new lows not seen since July 2005, closing at $16.27. Not only has the giant miner had to put up with falling iron ore and coal prices, but the price of oil has also plunged. Brent oil fell below US$40 a barrel overnight, as ongoing global oversupply and indecisive action from the OPEC oil cartel to prop up the price weighed on the black gold.
Speaking of gold, Societe Generale thinks the gleaming metal will be one of the first casualties when the US does begin raising rates. Head of Global Asset Allocation, Alain Bokobza has told Fairfax Media that he expects to see gold prices fall to US$955 an ounce by the end of 2016. Rising US interest rates make investing in the US dollar more attractive against gold.
Foolish takeaway
Thursday should be an interesting day, and I won't make any predictions beyond suggesting that the market moves could be substantial.
