Blind optimism driving markets

Our buzz phrase over the past week has been blind optimism; markets, particularly here in Australia, have completely bucked global political melodramas.

As a result of this blind optimism, the local market has had the strongest quarter in four years and the ASX has logged its second consecutive monthly beat of the S&P.

This is a great achievement; it suggests investors are looking to the ASX with renewed vigour as they believe it is well supported (and it is) with earnings that will justify the current level.

Questioning earnings season optimism

However, we question some of that wisdom, especially with the earnings call. Earnings season was just OK – nothing more. Revenue lines were weaker, but the slight beats on the earnings lines came more out of savings and cost cutting rather than growth, and on a forward PE the ASX looks expensive.

The equity trade has become crowded over the last six weeks, particularly as investors pile in looking for the capital gains on offer rather than the interest gains they have had over the last five years. The gains have been very handsome, with some investors finding 15-20% moves in a four month period. It is little wonder that people are starting to spend their money for the first time since the GFC.

This is all very positive for the investment community; it certainly restores much needed confidence in the market after five years of drifting in the wind. What we are now wary of are trigger points for short-term selling.

Today is pivotal for market moves

Today seems to be one of the trigger points. Don’t get us wrong, we see markets moving higher by Christmas on global confidence; however the short term macro data is a little weak. Being the first Tuesday of the month, plus the fact that Washington is in the final hours of farcical talks on a stop gap bill for the budget, means that the blind optimism trade of the last six weeks looks like being squeezed out, as profit is under pressure.

Over the next 24 hours the Japanese will release household spending data, Tankan manufacturing and non-manufacturing PMI data, cash earnings and have a ten-year bond auction.

Australia’s manufacturing index, commodity prices year-on-year plus new home sales and retail sales (which have been anaemic) are released. The RBA meets to discuss the cash rate and release its monthly statement on the economy. If the easing bias removed at the last meeting remains on the notes, the AUD looks set to be in for a longer period in the 90s rather than in the 80s.

China is now closed for the rest of the week, however today sees the release of its official manufacturing data. After yesterday’s final PMI read from HSBC was downgraded a full point from last week’s flash print, to 50.2 (just expansion), this piece of data will probably be the most influential piece of data on the ASX.

Finally, the US will release its ISM manufacturing data at 00:00 AEST and this along with the ADP non-farm payroll numbers may be the only read of the US economy this week, as the official figures due Thursday and Friday could be caught up in the government shutdown.

If market participants are looking for an excuse to take profit in the next 24 hours, one of these macro pieces will probably give them one as the likelihood of strong beats is low. This will make for interesting trading over the coming week.

Ahead of Australian open

Ahead of the open we are calling the ASX 200 up 10 points to 5228 (+0.19%) even after the DOW shed 128 points on the issue in Washington. If the ASX was to gain ten points that would be an unbelievable effort considering the US government shutdown starts at 14:00 AEST today if no deal is struck in the next five hours.

BHP’s ADR is suggesting the stock will drop nine cents to $35.65 (-0.26%) however this call will be thrown out the window at 11:00 AEST when the China manufacturing data is released.  As mentioned earlier, this will be the most influential read today and will be the barometer for cyclical trading. It is unlikely to be contractionary, however it could be a soft expansion number and that would be a negative on the whole cyclical space.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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