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After last Tuesday’s horror show, the calm that has descended and the value that has been added to global markets is pleasing. However, there are currently large miss-matches across asset classes, to the point of being contradictory in theory.
Equities and bonds are being bid at the same rate (each way bet on risk). Swaps markets are also ramping up, suggesting defaults are still imminent, yet risk currencies are shifting higher (the USD is unwinding having been overbid, but it is still a trade that should be considered odd). Equity values are back but there is a risk to it.
What’s making headlines?
- Last night was the first five-day rally in the S&P for 2015
- The S&P recovered to close the year in positive territory after losing 6% or more in Q3 just once in history – back in 1970
- SPI futures are up 5% since last Tuesday
- ASX has added 4.7% since crashing to 4918 points to close at 5150 – the highest level since 18 September
- The ASX has added $48 billion dollars in market value the past five days alone. Having lost $44 billion on Tuesday, it’s at a net positive of $4 billion in the last week
- Glencore has added 67.6% since its 29% collapse on Tuesday and had added 17% before this
- BHP has added 8.7% over the same period
The Trans-Pacific Partnership (TPP) is interesting from a political point of view, but from a market’s perspective it appears insignificant. Considering the outcry from The Republican Party and even some Democrats, the deal is unlikely to see daylight for years, if ever.
However, assuming it is implemented, the effect on most Pacific Rim nations will be GDP positive and therefore the effect on global growth will also be positively affected. It may just take several years. Soft commodities, intellectual property and exportable services are the big winners.
So, to those with medium-term views: diversified financial institutions, information technology firms and agribusinesses are the ones to watch.
But there are a lot of ‘ifs’. If it happens, if no additional caveats are added, and if there is no government change in the US.
Ahead of the Australian open
We are calling the ASX up a further 69 points to 5219. That would be a four-week high, and with BHP’s ADR suggesting it will add 1.2% today and oil adding a further 2.1% to US$49 a barrel, cyclicals are unlikely to be a drag on the market and this level should come to fruition.
What’s more, although the Reserve Bank of Australia (RBA) is likely to be a non-event currency today, traders and economists will be combing over the statement for any hints of rate cuts.
We think the statement will be even duller than the rates release as the RBA will not want to give anything away. However, there is no escaping the fact that the market is building a case for a December cut, with the interbank market now pricing in a 60% chance that Australia will get a 25 basis point cut Christmas bonus on 1 December.
AUD will be a mover and shaker and should be on our radar come 2.30pm AEDT.