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We suggested on Friday that there is currently a massive diversity of behaviours across global markets. Putting the fact that Australia is in the middle of earning season to one side, the US and Europe are currently positioning themselves for a very sticky month of trading.
On Friday night, more ‘uneven’ data was released from the US with building permits and housing starts in line with expectations, while nonfarm productivity and consumer sentiment were well short of expectations – seeing trading volatility push higher. This volatility again pushed equity markets violently in both directions over the intraday trading period to see the markets closing down for the day, and closing down 1.2% for the week – its worst trading week since June.
The only word that is coming off the floors at the moment to explanations the price volatility is ‘taper’. As we discussed on Friday, ‘taper talk’ is only going to get louder and louder, to a point of deafening. It is certainly heading to the deafening call earlier than expected. Friday saw massive moves in bond yields as US treasuries jumped as much as 24 basis points across the yield curve.
It is this kind of market action that is going to make the Feds job even harder. Disentangling monetary stimulus while continuing to support the economy is going to be like a baby learning to walk. They will fall over in the interim, and there will be tears and some bruised knees, the question is whether the bond and equity markets pick themselves up or if the Fed will help them up.
The biggest concern is coming out of the bond market; if bond yields continue to shoot up it will start to stall credit, funding cost will balloon and it will stifle growth. The Fed will have to have its finger on the button regarding speed and size of tapering. If it looks like the removal of funding is having too much of an adverse effect on the local economy it will have to step back in; or the more likely scenario, it will extend the timeframe for the complete removal of monetary stimulus and leave tapering on hold with a stimulus total at a lower amount.
This is why we believe the markets are at a tipping point; a correction feels like it’s only a day away, the markets continue to hold near record highs, yet volatility and market angst is increasing. As we get closer and closer to the 18 and 19 FOMC meeting volatility will only get stronger.
Moving to the local open and today marks the start of the biggest week on the earnings calendar. Over 50 companies are reporting to the market this week with most from the material and energy space. The cyclical trade has been a standout trade since the June 25 low, the question for investors is will be whether it’s a ‘sell the fact event’ or a chance to leg even higher.
Today sees some of the largest dividend players turning ex-dividend with Commonwealth Bank of Australia (CBA), Telstra (TLS) and JB Hi-Fi (JBH) taking 20.55 points out of the market alone, seeing the opening calls for the ASX 200 down 13 points to 5100 (-0.25%). This means several major stocks will be in the green to offset the dividend losses.
BHP’s ADR is suggesting the stock will drop on the open, down 11 cents to $36.76 (-0.29%), however today is the last trading session before the company reports to the market. There may be a buy the rumour trade in BHP today for a possible ‘sell the fact’ trade tomorrow.