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ASX underperforms despite positive price action

In what is arguably one of the biggest weeks of economic data for some time, Asian markets have started off on quite a mixed footing.

The ASX 200 has largely underperformed, despite more positive price action playing out in the AUD. US futures have been buoyed on good Black Friday sales (or at least the on-line sales side of things). It has probably had a closer correlation with the Nikkei ,which as usual has kept a beady eye on USD/JPY, which in itself is eyeing the year’s high of 103.74 in earnest and could feasibly push there by the end of this week if US bond yields head closer towards 3% - driven by US data.

Stock weightings always play a massive part in price action on the ASX and when you see the banks head south within the first hours, and BHP break through the lower end of the range of A$38.27 to A$ 37.18 (which it has been travelling in since late October), you are generally going to see the index struggle.

Looking at the price action on the index, it seems the bears generally have the upper hand of late, given the pullback from the October 28 high of 5457. However, for those who follow seasonality it’s worth bearing in mind that traditionally December is a good time to be long on the Australian market, with the index having rallied six of the last nine years and by an average of 3.3% in the months prior.

December usually a good month to hold stocks

Will this December be different? Perhaps. However, with the prospect that the market could have a clearer understanding of the stance of the RBA, especially in light that the AUD is around 3% lower on a trade-weighted basis since the November 5 meeting, things start getting interesting. We should also know the stance of the ECB, although most of the executive committee have tried relatively hard of late to bring down the single currency through jawboning, but with EUR/USD at 1.3600, the likes of Italy (who need a EUR/USD rate closer to 1.15) would probably mark their recent efforts with a 6/10 rating. At the end of the day it’s the Fed that ultimately occupies the world’s attention this week and thus while manufacturing and services ISM, Q3 GDP (revision) and ADP private payrolls will be closely followed as part of the taper puzzle, it will the Friday non-farms which could really see the markets consensus  of a March taper being tested.

It will be interesting to see trends in equities, bonds and the USD ahead of this data dump. My feeling is that the greater volatility will be seen in the long end of the US curve, while the USD will probably find greater upside against the AUD and NZD on good data, given we have already started to see big cracks appearing in many emerging market assets. The interesting aspect is the steeping of the US curve, with the short end largely unaffected by the recent moves in fixed income. The Fed funds rate is still only pricing in 52 basis points of hikes by December 2015, which hasn’t really reacted at all of late, so clearly the market is of a firm belief that the Fed will taper soon, but offset that with changes to the unemployment threshold for raising the Fed funds rate. This is a net positive for stocks, hence why I feel why the long S&P 500 and short ten-year treasuries will work well from here. It’s probably worth pointing out that the S&P 500 has rallied for the past five consecutive Decembers -  and seven of the last nine - so like Australia it’s generally a good time of year to be long on stocks. However, whether the market is still upbeat if there is an increased (and wildly out of current consensus) assumption of a tapering announcement in mid-December is certainly debateable.

US futures not reacting to price action in China

US futures haven’t reacted too much to the Chinese equity market today, which saw fairly whippy price action despite good PMI data released over the weekend. News around future changes to the Chinese IPO market the negative catalyst, presumably on the view that cash will be taken from current listed stocks and used to take part in the IPO process. There is also a reflection that some of the more forward looking sub-components were a touch weaker from the previous month, but from a headline perceptive we need to think that the Q4 GDP print will match (or potentially modestly outperform) the consensus of 7.6%.

Our opening calls from the close of the European cash market are slightly higher, with better two-way business from clients. We’ve already seen Hometrack’s November (UK) house prices running at a slightly better pace of 3.8%, and there has been a further bid in cable; hitting a high of 1.6443. In play today we also get the final reads on European PMI numbers, although they are not expected to change. We also get to hear from Ben Bernanke, although he is speaking to students taking part in a Fed challenge and therefore probably not the forum to detail either a strong hint around tapering or change to forward guidance. 

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