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Five trading sessions left in 2013

We saw text book trading yesterday in gold and risk pairs of the USD following the Fed announcement. 

On Thursday night trade was more varied however, as the differing opinions on how to read the move from the Fed translated into position trades and lead to fluctuated finishes.

With only two and half trading sessions until Christmas and five full trading sessions to the end of the year (December 24 and the 31 are half days), trading volumes will start to fade out. Price action post-Christmas tends to be the lowest of the year, which leads to strong moves in stocks and indices either direction.

That said, since 1950 the Christmas/New Year direction tends to average a 3.1% gain for US markets; the ASX’s gains are a bit less than that, but on average a positive move. A bounce prospect for the local market is a real possibility having seen the market contract 7.86% from the October high to the December low, with the losses accelerating in the last two weeks as investors looked to safety heading into the FOMC meeting. From December 1 to the December low, the ASX has lost 5.4%, however yesterday’s bounce wiped 104 points of the December deficit to be down 2.2% for the month which is a marked improvement.

Trade today will be interesting from an Asian-centric point of view, as the Chinese repo rates continue to react to policy changes around banking. The changes by the PBoC and the central government are very positive steps towards a more liberal and freely floating interbank lending rate, and provide insight into the steps that may be taken to see a freely floating CNY in years to come.

The current changes have seen the central government relaxing the interbank swaps of negotiable certificates of deposits (CDs). CDs are the first step towards a freer Shibor rate; interbank lending takes pressure off the central bank, allowing the lending rate to float rather than the current situation where the rate is heavily pegged.

It also shows foreign banks that interbank funding is possible and that potential political intervention is relaxing. This is just another sign that China is looking to further open its doors to global financing. ANZ has already made it clear it is looking to enter China at the earliest possible moment, as US and European banks also look to enter China’s financial system as soon as possible.

This is the first sign that policy changes from China’s Third Plenum are starting to be implemented; it will cause very short-term volatility as the changes go live. We will be watching the repo rates again today having seen them pop up yesterday, as it is expected to pop again today and may cause equities to come under some slight pressure.

Ahead of the Australian open 

The weakening dollar and the fact the ASX is lagging the gains seen in the US and Europe for December are the most likely reasons the market looks like carrying through with yesterday’s pop.

We are currently calling the ASX up 22 points to 5224 (+0.4%), however as I mentioned earlier volumes may be light as investors have already set off for Christmas holidays.

The positive lead doesn’t look to be coming from BHP as its ADR is showing the stock may correct around nine cents to $36.71 -0.25%, as iron ore experiences its seventh consecutive downward print to US$132.70 a tonne, having hit US$139.80 early last week.

I would expect the green on screen to come from the banks that have corrected 10% in the last six weeks, along with stocks that have taken a battering after downgrading earnings guidance. On the whole it will be a quiet end to what has been a positive week.

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