Stats and trends of note

Today will mark the end of one the calmest trading weeks since February and also see the ASX become the best-returning developed equity market in Asia for the week.

Source: Bloomberg

Neither events are surprising considering the three main factors that have been heavily impacting the index since mid-April:

- The ASX’s underperformance versus the MSCI world index. US and European indices have monstered ahead as the ASX has looked to be ex-growth.

- The impact of China, which is a major concern for cyclical material and energy names. However, the PBoC’s ‘stability’ liquidity has clearly leached into the economy and that will be a short-term positive for as long as it remains in place.

- Huge amounts of pessimism. Expectations for the upcoming earnings season are as low as they were for FY09 and FY10 (the GFC years). Year-on-year comparison figures will no doubt be lower. However, the possibility of earnings beating estimates is high. (Interestingly, forward EPS estimates have begun to be revised up in the past week.)

These points currently give me reason to be more optimistic and have for the past week. China worries have died down and Greece is now a non-issue (until September, anyway). The next month or two may be the first positive months since February.

Here are the likely reasons for a positive print in July and possibly August:

- July is historically the best month of the year for the ASX, with an average of 3.9% growth.

- This week will be the best weekly gain since 2 February, the week the RBA cut rates for the first time since August 2013.

- Business confidence is at its highest level in a year, yet consumer confidence is sinking to multi-year lows and the spread between business confidence and consumer confidence is at record highs.

- The downtrend in the ASX from April to June has been broken. The next test for the market is whether it can punch through 5700 points, which is highly possible.

- US earnings season will give global markets an extra boost, considering the low-ball estimates and the optimism it will create in investment sentiment.

Ahead of the Australian open

We are currently calling the ASX up 12 points to 5682. This could be the first-four day rally in the local market since 21 May.

What’s more, the trends in the USD are highly pronounced – those with overseas earnings continue to be the ones most are excited about.

However, only about 13% of ASX corporations derive the majority of their earnings from overseas markets. The stock-specific companies that do have overseas earnings and have exciting prospects over the coming earnings season are: CSL Ltd, Ansell Ltd, ResMed Inc, Ramsay Health Care, Macquarie Group, Westfield Corp, Henderson Group PLC and Platinum Asset Management.

My only warning is the macro picture can turn at any moment – be vigilant as storm clouds may return faster than expected.

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