US consumer confidence spikes

US consumer confidence registered its highest level in since October 2007 as the US earnings season registered another night of earnings beats once again.

Source: Bloomberg

The Dow finds itself back above 17,000 points and the S&P is at 1984 – on track to fully retrace the recent sell-off seen in September through to early October. The trading moves are very interesting, considering the news due to be released in the next 24 hours from Washington. Are markets trying to get ahead of the release? Most economists foresee the end of the asset purchase program but the status quo should remain on rates.

The earnings season stats continue to be unsurprising in their strength compared to estimates. Including last night’s earnings, 80.1% of companies that have reported have beaten earnings per share estimates, and 61.5% have beaten revenue estimates. I maintain a medium-term view that revenue growth of only 4% and earnings growth is 8% is unattainable on a aggregated basis.

There will be a point in the future where top-line growth will have to really pick up to keep corporations and economies expanding. The current global ‘efficiency’ drive now has a finite end. When the cycle does turn, companies will have to spend to increase future revenues. This is something to watch for in the years to come.

The earnings season’s market participants are also dismissing the recent pullback as the market jumping at shadows around Fed speak and European growth fears. Europe is forecasted to grow (however slight that might be), meaning things are fine. US corporate earnings are humming and US growth is also solid – more positive news.

However, low levels of growth leave no margin for error and the US is facing near-certain rate rises in 2015. I remain bullish on the VIX and, despite the fall over the past two weeks, markets are never linear. Low volatility due to unconventional monetary policy will come to an end. Be vigilant as it will return in force.

Ahead of the Australian open

There are plenty of questions now for the Australian market, considering the current retracement of the 9.4% pullback from the August high to October low. We’ve seen a very strong and targeted rally in the index, with defensive industrials the main beneficiaries.

However, the ASX at 5450 is near to the 61.8% retracement of the recent pullback – the point where the market faltered in the past two trading days. It should move through that on the back of US market strength today.

The banks report at the end of the week and go ex-dividend in two-to-three weeks. There has been textbook ‘buy the rumour, sell the fact’ trading in the banks. The ASX is bouncing between 5350 and 5500 as the earning season heat comes out of the market.

Only two of the past eleven trading days have been negative, with a combined total of 11 points lost compared to 297 points added over the same period. Resistance will pick up in the banks and cyclical material plays are unlikely to support the rally due to underlying commodity prices. The next month is likely to see more red on screens before the typical ‘Santa rally’ to finish 2014.

We’re currently calling the ASX 200 up 39 points to 5492. Considering the positive reads from London in the big miners, there will be support from all sectors. As iron ore fell again to US$78.8 a tonne, junior miners may continue to see downward pressure as they struggle to keep their head above water.

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