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Geopolitics is just a flashpoint away - Russia being the case-in-point, with last night’s credit downgrade to junk status. Greece also voted in an anti-austerity government, as expected.
Finally, inflation – whether it’s oil, wages or stagnating consumer consumption, inflation remains a ‘cut’ risk to monetary policy and a general risk to economies everywhere.
These views remain my baseline point strategy formulation. I see positive cyclical risk in the second half of the year as the top-down effects start to feed through to corporate earnings and consumer sentiment.
However, current cyclical risk remains too high to be championing a return to those that have seen share prices halved. There are trading opportunities here but formulating anything more than a nine-month view is hazardous.
A key example of cyclical risk form a bottom-up view is energy. Production results from the likes of Woodside and Santos (STO) were mixed. WPL saw average prices falling over 25%. STO saw record numbers. However, it has certainly opened the door for impairment charges come the mid-February earnings release. WPL is now facing major headwinds from the market on whether it has the ability to provide the forecasted dividend in the face of declining prices. STO will be questioned on its general position, considering debt was at 31% at the time of the previous update.
I think we’re likely to see sharp intraday and even two-to-three day positive rallies, particularly leading into earnings. However, I see these as very short-lived. I would be trailing stops to avoid profit erosion as the likely flip trade will tap out those not nimble enough to deal with the swings.
The question is whether you can formulation your strategy from a bottom-up fundamental view. Although macro data will fade slightly this week, it is still more likely to move markets than any micro details.
Australia sees its inflation read on Wednesday, followed by the first RBA meeting of 2015 in seven days. Although I see a slim chance of a rate cut on the back of the employment read and the currency having smashed through 80 cents, the market is still pricing in a 35% chance rates will fall.
This will put yield differentials front and centre and will reinforce the quasi-bond trade for Australian investors. The banks, Telstra and the supermarkets all remain well bid heading into the RBA meeting and the Australian earning session.
Ahead of the Australian open
ASX is pointing higher on the open. We are calling the market up 14 points to 5516. However, buckle in for some wild trading in iron ore miners as new five-and-a-half-year lows in the price hit the headlines. Iron ore into Qingdao fell to US$63.54 a tonne, and BHP’s ADR is pointing lower to $29.05.