Greece took a breather with some European markets closed in observance of Epiphany Day. Equities have continued to decline with investors flocking to bonds as global markets navigate an uncertain period yet again. JGBs have been a preferred destination with yields on the 10-yr dropping to a record low of 0.28%. Yields on bunds also dropped with the German 10-yr yield now at around 0.447%. Surprisingly though, European debt markets are still relatively calm with peripheral yields not really rising like many would have expected. There have been suggestions this is because European financial institutions are now a lot less exposed to Greece with minimal Greek bond holdings. At the same time, European financial institutions seem to be in a better place after the recent conclusion of the financial stability review. However, should this Greece situation continue to flare then I’m sure at some stage the fear factor will catch on. As a result, I’m very cautious on equities at the moment.
US pullback could be a positive
As far as equities are concerned, it has been a lacklustre start to the year and perhaps this is the pullback that markets needed. With the S&P having hit around 51 record closing highs in 2014, we were bound to see an unwinding at some stage with outflows from equities and into other asset classes and cash. According to Bloomberg, the consensus year-end target by strategists for the S&P 500 at the moment is 2050 and following the recent pullback, we are now around 2.5% away from this target. The P/E ratio for the S&P is currently at around 17.7 times and is expected to drop off to around 16.17 by the end of the year with a dividend yield of around 2%. Additionally, buybacks are expected to contribute around 2% to investor returns. In terms of EPS growth, the S&P is expected to log around 10.5%. However, it is early days and there is still a long way and we still have plenty of economic data, corporate earnings and other global events to play out.
Energy weighs on ASX 200 again
It has been an uneventful day for the ASX 200 with energy stocks continuing to underperform due to the uncertainty in oil prices. Santos, Oil Search and Origin are all down around 2% and services provider WorleyParsons Ltd is nearly 5% lower. There are some bright spots in the iron ore space with Arrium, Atlas and Mount Gibson all positive presumably due to the recovery in iron ore prices. Yesterday’s trade balance numbers also showed a big pickup in iron ore exports in November and this is an encouraging sign. Precious metals names such as Medusa Mining and Northern Star are also firmer with gold trading at three-week highs. The consumer discretionary sector remains a worry with retailers struggling as we head to Friday’s retail sales numbers. Australia has not quite seen the strength experienced in global peers like the US and UK over the festive season on the retail side of things.
Mixed open for Europe
Ahead of European trade we are calling the major bourses that traded yesterday mildly firmer while markets that were closed are likely to trade modestly weaker as they play catchup to yesterday’s moves. There is quite a bit of activity on the economic calendar with German retail sales, unemployment and the region’s CPI due out. This CPI reading has been pinned as a key indicator for the week and is likely to have bearing on how the euro travels in the near term. On the US side of the equation we have ADP non-farm payrolls and FOMC meeting minutes.