Global Markets Overview – 1/2/14

If history is to be any sort of guide then January, and specifically today, should be a good one to be long on global indices and risk assets in general.

The fact is, over the last ten years the ASX 200 has not done so well, recording an average loss of 0.6% for the month of January. However the 6.2% fall in 2009 and 4.9% pullback in 2008 clearly distort this average, so looking more closely at the last three years; the index has averaged a massive 3.4% gain in January. More specifically, the first day of the New Year is generally a good one, with gains of 1.2% seen last year and 1.1% in 2011. This is clearly backed by strong gains in other key developed markets, with a gain of 2% seen on average in the S&P 500 on the first trading day of the year over the last five years.

This phenomenon should really be put to the test today given the flat overseas leads and limited news flow that needs to be priced into markets from the New Year break. Of course the issue of low liquidity will still be prevalent and the full trading and investment community won't be back in until next week, so there will be an element of money managers still using today to talk to clients and express investment plans and ideas.

Chinese stocks performed well yesterday

The one market that was open yesterday was the Chinese market and a gain of 0.9% was seen in the Shanghai Composite. This was down to strong gains in listed brokerage names, after China's Business News (CBN) reported that six IPO's were granted licence and expected to raise just over $3 billion. Of course on one hand this is positive for financials as it helps increase fees and therefore boosts the top line, however with over 700 further companies looking to list this year, the clear concern here is where all the money will come from to fund the equity purchases. The fact that the Chinese market is trading on one of, if not the lowest price-to-earnings and price-to-book ratio in global markets is testament to the fear that funds will, and have been, selling long held equity positions to fund potential purchases.

Perhaps the biggest piece of news which was released on New Year's Day was the China official PMI print for December. This came in at 51.0 from 51.4 in November, with expectations in the market for a read of 51.2. The important thing here is manufacturing in China is still expanding, however it is just shy of what the market was expecting to see, but judging by the limited moves in the AUD in early trade, the modest miss hasn't affected confidence too much. We also get the HSBC manufacturing PMI report at 12:45 AEDT.

Korean exports indicate good things for global growth

It's also interesting to see Korean trade balance figures (also out yesterday). Many see Korean exports as a leading indicator for China's exports, which are generally always released after Korea's. Interestingly we saw a 7.1% increase in exports in December, while economists were expecting a 4.8% increase. This should be seen as a positive for risks assets as it feeds into the idea that global growth should continue to move higher this year.

So a flat open should be seen, although we will have to see how S&P futures open at 09:00 AEDT to gauge a more realistic view on how local stocks will fare. On a stock level BHP's ADR (provided it's accurate of course) is suggesting an open at A$38.34 (a potential gain of 0.9%), which would see it trade above the strong supply seen in the latter stages of 2013 at A$38.27. A failure to close above the November high of A$38.27 would be taken fairly bearishly, while a close above would signal a stronger move to the 2013 high of A$39.34. Woodside Petroleum (WPL) is another that could be in focus, with further speculation Shell may offload its 23.1% stake in WPL within weeks, although the likelihood is it won't all by offload at once. Trading WPL has been a range trader's paradise and since July the clear winner was to simply buy around $37.00 and fade moves above $39.00. With the 50-,100-, and 200-day moving averages all clearly trading sideways, this is suggestive that many will continue to deploy this strategy, however if this news does materialise then perhaps a break of A$39.50 could develop.

Locally there is limited economic data to look out for, however US data will be in play with initial jobless claims out tonight, while there are no less than nine (including Ben Bernanke) Fed speakers out of the next two days and their views on both the taper argument and more importantly keeping the funds rate low for an extended period will be the key for all asset classes.

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