Global Markets Overview – January 12, 2015

Low expectations

The US earnings season begins tonight and Australia's earning season begins in two weeks; expectations for the both are low at best.

Corporate America is bracing for the impact of the return in value of the USD and the fact that global demand has slowed.

• Consensus earnings estimates for the quarter are for a measly 1.1%, which compares with estimates of 1.6% in the third quarter which were accused of being low-ball at the time.
• The major banks are due to start on Wednesday, with Wells Fargo's earnings per share expected to be 1.6% lower compared to the previous quarter. JP Morgan's estimates are for a similar read.

Historically the next two weeks are corporate confession season in Australia; we expect this season to be the same, with the sectors to watch being retail, materials and energy.

• Retail sales growth over the final half to 2014 was anaemic; the fact we saw pre-Christmas sales last year illustrates that cash flow has be weak and firms have had to safeguard revenue by sacrificing margin.
• The bear market in iron ore will be laid bare over the coming month. Producers with slightly impacted balance sheets or are at the high end of the cost curve are once again likely to feel the full force of market concerns.
• The crude price has just logged its seventh consecutive weekly loss and the expectations are for the negative effects to filter through to earnings. Currency and market hedging will mitigate some of the damage; however mid-cap and junior energy players are expected to underperform.

Signs of Volatility

Friday saw the US snapping a two-day winning streak as the growth of the world outweighed the outstanding non-farm payrolls figure. There is a cynical way to review the figure; the rally on Wednesday and Thursday was down to the fact the FOMC minutes provided further evidence that the Fed funds rate is locked in at record lows for the next four months.

Further signs that the US economy is withstanding the global slowdown and is actually accelerating in areas of employment will bring rate expectations forward. The only brake would be inflation undershooting.

Like the end of last year, volatility will spend another year in the headlines. Greek elections; OPEC disunity; the collapse of the Russian economy; credit spreads; commodity bear markets and growth will all appear in the headline to great volatility. It will provide plenty of opportunities for the nimble.

Ahead of the Australian open

We are calling the ASX down 44 points to 5422 as the plunge on Friday night comes to Asia. We remain cautious of January trading as trade volumes continue to be well below the daily average. I don't expect this to return to normal until late in the month - even as late as early February.

The fall in the oil price will likely see the gains from the end of the week in the energy space evaporating, while the defensives may also see pressure as the sell-off in the US was broad based and indiscriminate.

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