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Slow news is good news

There is little in the way of macro news at the moment and this is allowing the markets to run; the US markets, in particular, are gunning for any reason to head higher.

US Markets
Source: Bloomberg

The S&P made another record high overnight. As did the DOW.

The reason for the market strength remains the US economy. It’s the main topic of discussion from the Street. Having seen unemployment at its lowest level in six years, job creation now averages a touch above 213,000 a month. In the last nine months, every print from the non-farm payrolls has been above 200,000. However, something that is becoming interesting, and will be a piece of data to watch in the coming five to ten years, is whether the US participation rate continues to fall.

The participation read on Friday was the lowest read since mid-1977 and it appears this trend is unlikely to slow down. The reason behind the sustained fall is that baby boomers are now retiring at a faster rate and in higher numbers than ever before. This comes at a time when generation Y and millennials are not entering the work force at the same rate. This is due to university, travel and other personal decisions. All of which leads to low participation.

I point this out because welfare in the US is also at its highest levels in years, social welfare payments are the largest budgetary item in the US and, at $846.1 billion, it is only going to increase as more retire. The issue is the tax base isn’t increasing at the same rate as social welfare, nor will it be enough to meet the increase in social welfare payments. Considering the debt levels in the US, this will be a major political headache in years to come.

However, coming back to a short term view and the moves last night highlight that in the low interest rate world, with global central banks still injecting funds at a rapid rate, asset values are only going to increase. The old adage of don’t fight the Fed, really translates as don’t fight the central banks.

It suggests to me, that even though I see November as a tepid trading month, the likelihood of an upside month looks to be the greater risk than a downside. This is despite the fact the markets have seen four weeks of green and the fact commodities can’t find a floor to stick into. The knife is still falling in oil, industrial commodities and iron ore. So, I would be watching anything with US-exposure, or that continues to return capital to shareholders, as being very attractive in the current environment.     

Ahead of the Australian open - Lest We Forget 

Today is Remembrance Day so trade may be slow in the first two hours of the morning.

The ASX is currently seeing see-saw trading from its two major sectors. When the large cap financials are down, the material plays are finding support. When the materials are down, the financials are up.

I have been asking myself how will the ASX get back to 5679 before the end of the year and the answer has to be strength from the cyclical material plays. The banks are within 5% to 6% of their record highs (disregarding NAB), so rapid growth upside is unlikely in this space. This means energy and mining plays are going to have to do a lot of heavy lifting.

With iron ore at US$75.5 a tonne, it’s hard to see this being the case, as the ASX looks range bound between 5450 to 5550. However, if the US continues its race into space, the ASX will get to hold onto its coattails. Then the market will have to break above the 2012 uptrend. With current sits at 5585, breaking above that would be a bullish signal.

We are calling the Australian market up 17 points to 5540 which would suggest the banks will bounce back this morning. However, judging by the moves in metals exchanges overnight, materials may give back all of the gains from yesterday. Expecting a very slow news day.

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