Global Markets Overview – 1/3/14

It was a strange old session on Wall Street and in Europe; however the end result should be weakness in global cyclicals in Asia today.

By all accounts money managers took profits off the table due to tax reasons, and the S&P didn't rally on the first day of trading, which is the first time this has happened in the US in six years. However, volumes have been poor, so this view around tax-related selling seems more a theory.

The irony of the likely weakness in industrials, materials and energy names today is that global data was actually pretty good. We know the Fed is expanding its balance sheet at a slower rate and we should hear more about that in the next two days, with ten different speeches from Fed members due. However, what's important now is that the stimulus void is filled by other central banks, notably the BoJ and perhaps the ECB, while the US economy drives global growth towards 3.5%, with the strength having an impact on Europe, which in turn should support Asia.

Global data is fairly upbeat

If you look at the data, the continuation of manufacturing strength is clear, with US manufacturing ISM growing a modestly slower pace; however, with the index still at 57.0 (anything above 50 highlights growth) that is still very healthy. What's more, the new orders sub-component index pushed to 64.2, showing good expansion and in turn the employment sub-component also grew at a faster pace. Complement the manufacturing ISM with a slightly below, and therefore better jobless claims, and it makes no sense to see the S&P fall 0.9%, with a four basis-point fall in the ten-year treasury.

In Europe, when you see manufacturing being revised higher in Germany (and therefore the Eurozone group itself), Italy, and even Greece, you may expect good gains here, but alas, France continues to go backwards. You can see the yield premium French debt has over Germany debt, and it continues to move higher, while the DAX is outperforming the French CAC by nine percentage points over the last three months.

Volumes still key

Still, technicians of markets are not only concerned by the price action and how an asset gets from A to B, but how it got there and the quality of the journey. That means looking at volume, and when you see S&P volumes below the 2013 average, it means today's drop gets far less credence. If you look at the ASX 200 yesterday, we saw just over $2 billion of stock traded, that's only $300 million more than we saw on New Year's Eve, and that was an early close!

So I actually see today's pullback as a non-event, at least in terms of market sentiment and the psychology around it. However, we should see Asian markets react, and as it stands we see the ASX 200 falling 0.7% on open to 5330. It's hard to really pin-point any bright spots, but it seems logical that defensive names should outperform, while gold stocks should continue to find support, although most of the gains in gold on the session took place during Asian trade, and therefore are priced into Australian gold plays to a large degree. Some of the moves in individual equity names of late have looked quite constructive; BDR has rallied 29% from its December low, MML 35% since it found further support off a$1.60, while NCM has broken its recent consolidation pattern to the upside.

Energy will get a strong focus, with WTI and Brent falling over 2% from yesterday's cash close. On the other hand, natural gas is actually doing the total opposite and has rallied 2% in the same time frame. If you look at names like WPL, its correlation with any of these three commodities is actually fairly low, so a simple look at how US energy names performed suggests we should see weakness in this space.

AUD/USD supported on dips

On the forex side, AUD/USD is fairly flat from yesterday's equity close, so stocks which source a large portion of revenue from offshore won't get too much of a kicker. Looking around the G10 region though, it's worth pointing out that EUR/USD has started to look quite vulnerable and there are a number of reasons why I think 2014 could be the year we see the EUR bears actually get the trade right after what was a very frustrating year for those consistently calling for EUR/USD to move below 1.25.

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