Japan and US providing platform for ASX

It should be a positive day’s trade in Asia today, although the ASX 200 will be a hard one to call as the SPI futures have been shut since 14:30 AEDT on Christmas Eve.

However, if we look at global influences such as the S&P futures and the Nikkei we should see an open of around 0.5% to 1% higher. The US market has pushed up a sixth day (the first since March) on the back of solid holiday sales and a drop in jobless claims, and thus the S&P 500 (March) futures are 0.8% higher from where they were trading at the same time the SPI futures closed on Christmas Eve.

The Nikkei continues to grind higher

The Nikkei continues to show real strength and closed at a new year’s high yesterday, with a modestly stronger open expected today. USD/JPY continues to move towards my long held year-end target of 105.00 and is clearly getting a helping hand by the fact that the US ten-year treasury is at 2.99% and testing the September high of 3%. The ever increasing premium the US ten-year treasury commands against other developed market bonds (with the exception of Australia and the UK to a degree) is clearly increasing the USD’s appeal, and again this should be highlighted in the weekly Ministry of Finance (MOF) fund flow data.  These figures are released at 10:50 AEDT and could show an eleventh straight week of buying of foreign bonds from Japanese investors, which has been a key reason why we have seen such good JPY strength of late (think currency outflows).

Staying in Japan and at 10:30 AEDT we get the November CPI (ex-food) read and the market expects an increase to 1.1% from 0.9%. This would be the highest inflation reading in Japan since November 2008 and suggests that ‘Abenomics’ is actually on the right track, although there is still much to do on the structural side and this is going to be a major thematic in 2014. We also get the Japanese jobless rate, retail; trade and industrial production in early trade.

China under pressure despite calm in its money markets

It’s worth noting that the Chinese market was down heavily yesterday (down 1.8%), despite continued calming of financial conditions in its money markets rates, after Tuesday’s open market operations to inject capital bank into the market through reverse repo operations. This could hold the Australian market back a touch, although BHP’s ADR is suggesting an open 0.7% higher. It could also be part of the reason why AUD/USD is back below the 90 handle, although I suspect that is more a function of USD strength. It’s worth pointing out that AUD/USD has traded in a 20 point range from 14:00 AEDT yesterday, which seems fairly predictable given the lack of market participants around.

So in terms of the Australian open, the US and Japan are providing a positive backdrop for share price appreciation, while commodities are also modestly stronger. However, as detailed China could subtract from sentiment, especially as we are seeing escalating tensions between Japan and China, while China also cut is growth forecast for this year to 7.6% from 7.7%.

On a sector level the retailers could get some focus, with the Australian National Retailers’ Association estimating Boxing Day sales alone may have exceeded A$1.9 billion. Gold stocks could see some further short covering, with the precious metal pushing up 1% from Tuesday’s cash close. Banks should continue to perform well and it’s interesting to see the strong price action in names like MQG and BEN and look like they could push higher. You can also throw in TLS, CPU, FOX and PLA, which are also trading over two standard deviations from their 20 day moving averages and have an RSI above 70. To me this highlights the momentum currently in the stocks and thus pullbacks in these names should be bought.

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