A tale of four regions

The USD continues to trade as an asset currency while the EUR, JPY and to some extent CHF are all back to being funding currencies and equities trading reflects this.

 

Stocks
Source: Bloomberg

The current market environment is dividing global markets with clear winners and losers:

The four regions to watch:

China – the equity bright spot

- Has seen three rate cuts in the past six months. Stimulus has assisted investing and expectations are building that a fourth is not far off as well.

- Beijing has brought forward another infrastructure project on top of the projects brought forward midway through last year - creating billions of dollars of spending and employment.

- Property continues to slow as new rules curtail borrowing for second and third homes

- Investment in mainland China is now pouring into equities

Getting exposure to China remains a key call in the current market conditions

Europe – Sovereign risk plays

- Rumours are mounting the ECB will accelerate its €65 billion-a-month bond buying programs, by front-loading the programs to increase European economy activity.

- Greece is becoming a positive risk as both Angela Merkel and Francois Hollande want the country to remain in the EU, suggesting a deal is more likely to occur than not.

- The ECB and Greece will see EUR/USD declining and heading back to parity over the medium term, increasing European competiveness

The US – valuation

- The US is into its seventh consecutive year of gains – driven by mass central bank stimulus. However, it has never managed seven consecutive years of gains in its 150 plus year history

- Record highs for the DOW and S&P and 15 year highs for the NASDAQ see value being questioned

- Fed members are cautioning that the run in both the bond market and equity markets is a risk and one that may need to correct to find longer term stability.

- Growth and inflation in 2015 has stalled (and possibly contracted)

- Employment, however, is heading back to historical lows and the housing market is back to pre-GFC levels.

- Will raising the Fed funds rates create ‘taper tantrum’ 2.0 as valuations catch up on price?

Australia – Bank heavy

- The ASX at one point this year was up over 8%. However, as the yield trade has been questioned and the AUD starts to move higher even with two rate cuts - the carry trade is evaporating and the risk premium in the ASX appears too great for both domestic and international investors.

- The banks remain the biggest concern – all have technically corrected and even so are fundamentally still expensive on a price to book and price earnings perspective.

- The banking sector makes up 29.85% of the ASX 200 - 26% of that is the big four.

- Iron ore and oil are both reversing after bouncing in the past six weeks adding to the downside risk for the index after seeing a solid recovery in materials and energy sectors. As the three tables above illustrate, the ASX is being left behind once more as its appeal as a yield and cyclical trade destination are a decline on fundamentals.

Ahead of the Australian open

Fairly indifferent leads for the ASX 200 from last night’s trade - we are currently calling the market down a solitary point to 5614 based on the futures market. Iron ore and oil both fell again overnight as iron finally gave up on the resistance at US$60, so I suspect the slide in market to unfortunately continue.

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