ASX continues to grind towards year highs

US markets continue to print new highs and the ASX edges closer to year highs, showing that 2013 has been a year to follow the money, follow the trend and not be a contrarian.

Whether we see this scenario play out in 2014 is obviously yet to be seen, but with consensus expectations that the US central bank will halt its QE program in the latter stages of 2014, correlations will be broken, a rising tide will not lift all ships and companies with poor fundamentals will generally be treated accordingly. Still, that is an issue for another time as today is shaping up to be a positive one in Asia.

A stronger open expected in Asia

The ASX 200 looks set to unwind at 5318, so a gain of 0.5% is expected. A close above 5320.05 would see the index back in positive territory for the month and would mean the index would be up seven of the last ten years, although we will need to see a move of 1% or more to mean December is the best performing month on average over the last ten years (with April currently getting that title).

Things were looking fairly bleak a couple of weeks ago, but after pulling back to a low of 5028 on December 12, the market has (provided our call is correct) put on 290 points or 5.8% in eight sessions. The short-term trend has turned more positive, with the five- and ten-day moving averages trending higher, while the 21 day moving average is threatening to turn higher, but is flat at present.

Momentum favours further upside

Momentum indicators are suggesting a move back to the year’s high of 5457 is on the cards and as long as financials are working, this could still play out in the coming weeks. Momentum on a sector basis is broad-based, with the industrial sub-sector the laggard with a gain of 3%, while the telco space is on fire right now.

Japan re-opens today and should be onto a flyer, with a gain of over 1% expected. USD/JPY continues to oscillate around 104; a function of a slightly below expectations core PCE print in the US (1.1% versus 1.2% expected), whilst personal spending and the University of Michigan confidence print came in-line. The end result though was a four basis points move to the upside in the US ten-year bond and at 2.92% is eyeing the September high of 3%. I continue to like USD/JPY and would be buying dips in the pair down to 103.70.

China managed to snap a nine day losing streak, despite another sizeable move high in its repo market. The PBOC can add liquidity today through its open-market operations (reverse repos), but may choose alternative measures to address liquidity, so with little on the calendar today in Asia the Chinese repo market will continue to take a focus. Still, it’s worth remembering local traders (well, anyone outside of China) have failed to be negatively affected by tighter financial conditions in China of late.

Little on the calendar to cause concern

Those who are left in the market today will focus on tidying up positioning ahead of the Christmas break ahead of France and Holland’s GDP print and US durable goods unlikely to cause too much angst.

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