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The three trading events of 2015

Plenty of risk, plenty of uncertainty and a good dash of fear has welcomed the markets to 2015.

Crude
Source: Bloomberg

This is certainly changing the dynamic of global markets. The average intraday move in the S&P for the 14 days of 2015 is 1.08%, for example, while the daily intraday moves for 2014 stood at only 0.58%.

There are going to be several reoccurring events this year – one is already hitting full stride in the collapse of crude. The others are likely to be Eurasian political risk (Russia is millimetres away from default), ever-prevalent fears of a Chinese slowdown, credit risk, commodities remaining in bear markets and wage growth. All will have some form of impact on the global economy over the next 351 days.

However, I want to concentrate on three of these themes. I think there are plenty of trades to be had and your strategy for trading in 2015 needs to be nimble to take advantage of what is likely to transpire.

The three events  

  1. Crude: US$40 a barrel will be a self-fulfilling trade. This move still has plenty of room to the downside and momentum is with this trade. The supply glut is not going to end in the interim, barring any OPEC intervention, despite the fact China is obviously buying up crude in the physical market. The short here is well and truly intact. Technical and fundamental analysis is clearly stating this trade should remain a short sell and the momentum is adding weigh to this call. However, the moves in oil are creating a reset in equity evaluations. The snap back in the energy sector in the second half of the year will be violent as the short covering comes into play. Be ready to position yourself for a recovery story as the fundamentals turn positive.

 

  1. China: two steps forward, one step back as infrastructure spending and exports are up – the trade balance data confirms this trend. Yet growth concerns are building, GDP is estimated to be moderating towards 7% and it looks unlikely we will see a return to the days China where was growing at double-digit rates. What is also likely to rattle China in the first half of the year is fiscal reform. Deleveraging and repurchasing operations to drain liquidity will amplify the fears China is slowing. Avoiding risk in the first half is likely to be an adventurous strategy here. However, we are likely to see a growth-led recovery in the second half of the year on spending and infrastructure projects.

 

  1. Commodities:  Copper and iron ore remain stuck in downward trends on fears China growth will not pick up. Copper is under real pressure and the red metal is currently at 2009 lows. If it breaks below US$5776 a tonne, the bear market is on and the likely supply response will be to ramp up supply, adding more pressure to the downside. However, again we would want to be positioned for a recovery in the second half on Chinese demand. Copper and iron ore have seen increased demand from China in the past two trade balance releases and, if infrastructure spending ramps up as expected, industrial metals will see a return to favour.

 

Ahead of the Australian open

The volatility of the markets continues to impact global trade. Europe exploded to the upside on the mere whiff the ECB will enact a QE program, whereas US markets fell again on the slump in commodities. These leads mean we are seeing SPI futures lower, and we are calling the ASX down 30 points to 5374, as the energy and material spaces in the US were the hardest hit. Iron ore fell back to the lows seen at the end of last year to be sub-US$70 a tonne and this is like to drag energy and materials lower today.

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