Geographical differences

A look at the variances throughout the globe right now.

Source: Bloomberg


People’s Bank of China: In a slight surprise this week, the PBoC did not use the reverse-repo operation to drain the excess liquidity in the market. Most had forecast this would take place considering the fiscal policy changes currently underway. To my eye, this signals intent that 2015 will be a growth supporting year; interest rate cuts, reserve requirement ratios and further disbursements will be a theme from China in 2015.

Shanghai-Hong Kong  Connect: Almost three weeks into the program and volumes have seen record flows through the Shanghai exchange. The increased volume is creating real trading heat and with Shanghai trading on high single digit P/E, international investors will continue to want exposure to the growth market that will be supported by growth policies.

The US

Federal Reserve funds rate: No longer is the US edging towards an increase in the Fed funds rate – it’s marching to it.  The data is consistently strong, having seen nine months of consistent jobs growth (averaging well above 200,000). PMI reads are in high expansionary territory. Last night, the ISM Services PMI registered its second highest-ever read, beaten only by a print in 1995. More and more Fed members are talking up that ‘considerable period’ has past and that ‘data dependent’ moves in the Fed funds rate are now appropriate.  

S&P: The slow grind higher is likely to continue in 2015. EPS growth in the US looks solid, the USD remains the investment currency and wealth is expanding. More and more global investors are going to want to be leveraged to the US and any dips are likely to snapped up.


European Central Bank: The prospect of a sovereign bond buying program is looking ever more likely. It probably won’t  begin tonight (however, we see further corporate bond buying this evening). The prospect will only increase sentiment towards European equities. The DAX is threatening to break through 10,000 and it is likely to be another standout index next year.  

The periphery: With the increasing prospect of sovereign bond buying, the market continues to flatten the bonds spreads in the periphery. Yields in this region have fallen upwards of 200 basis points from the start of the year and that is likely to push lower still on the announcement that the program is going to be enacted. This will push more investors into European equities and why Europe is likely to see green in 2015.  


Rates: Will they or won’t they move on rates in 2015? The GDP read yesterday is creating a very dark shadow over the state of the Australian economy with income growth now in recession. The pressure on growth in 2015 is ratcheting up as key commodities remain in bear markets and if housing cools, this will only accelerate. All of this is sparking mass changes in rate expectations with four major investment houses now expecting two 25 basis point cuts in 2015. The cash rate is also expected to fall to a new record low of 2%.

Yield: All of this points to the trade that has worked so well over the last three years returning in 2015. The market is showing that even with increase capital requirement and possible macro-prudential measures, banks are likely to be supported as yields remain defensives and could again be the backstop for the ASX 200 next year if the RBA does move rates lower.

Ahead of the Australian open

Based on the moves in the futures markets overnight, we are calling the ASX 200 up five points to 5343 as BHP and the energy space continue to recover from the savagery of the start of the week.


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