Triple witching on Friday couple plus further digestion of the Fed made for quite the trading day in the States. Friday’s option expiry was the fifth biggest in history as futures, index and equity options all expired on the same day as an event that happens as often as a blue moon. It did make for some rather ‘excitable’ trade.
Comparing the US cash market commotion to the SPI futures Saturday close, you can see that a possible correlation to the open of the ASX cash is low and it should be as affected as the headlines suggest.
SPI futures are down 0.6% compared to the S&P futures, which are down 1.2%. The correlation coefficient between the two is at its lowest since October and back in negative territory.
Seven trading days to go
- The ASX is down 5.6% year-to-date and it needs quite a push to finish in the black. This would see it snapping three consecutive years of gains at an average 10.3% growth per year.
- The oil price is at the lowest level since the height of the GFC with WTI trading at US$34.70 a barrel – the same price as July 2008.
- Iron ore is at its lowest level in a decade for delivery into Tianjin and at a record low for delivery into Qingdao. The terms of trade for Australia are under the highest levels of strain since the GFC and the structural change in the economy is yet to truly take up the slack, despite green shoot signs that the shift is underway.
- But confidence at business and consumer levels is equalling yearly highs and conditions are at three-year highs.
- Credits remains at the strongest level in over two years and lending (despite new prudential rules) also remains highly fluid and has been a major source of growth.
- Domestic trade is solid and service investment has also picked up in 2015 despite the slowdown.
This leads to the big questions – the underlying position of listed firms.
- Top line growth in 2015 has been anaemic – 0.8% growth calendar-year-on-calendar-year, compared to 1.8% and 2% in 2014 and 2013 respectively.
- Earnings has continued to grow but this has been down to capital constraint initiatives and the concentration on neutral OPEX, which is entering its fourth consecutive year. This is coming to its finite conclusion as CAPEX consolidation is reaching its equilibrium.
- That brings me to price-to-earnings ratios (P/E) – the great divider for investors currently. The current P/E on the ASX is 18.2 times and 14 times on a forward blended basis.
The ‘E’ is the big question – will the commodities complex create the largest drag seen since 2009? Has the slowdown in the housing-led recovery hit service firms on the ‘E’ line? Or has the domestic consumer saved corporate earnings in the largest sector on the ASX? These are the questions we are asking ahead of the February reporting season.
However, come the next seven days we are still seeing some buying in this market. We see several oversold positions being closed and managers are looking to close the books on a positive note. We expect the ASX to remain above 5000 points for a ‘positive’ end to a negative year. We remain confident that buying will continue for the last seven days of trade.
Ahead of the Australian Open
We are calling the ASX down 0.45% to 5072.