US earnings season continued to show that earnings in the final quarter grew between 6% and 8% and this added support to the reasoning that the S&P has its best trading year since 1997.
The snap-back overnight was due, after having seen the Dow off over 400 points in the past three sessions and the S&P off 50 points over the same period on profit taking and ‘general concern’.
The bounce overnight was relatively universal which has led some to point out - ‘traders beware of the dead-cat bounce’. I do understand this call; macro issues continue to dominate financial headlines.
Headlines around a China slowdown and its effect on Asian neighbours will only accelerate over the coming weeks, as Chinese Luna New Year hits the entire Asian region. Do not be surprised to see China data disappoint in February and March, as retrospective January and February data is released which could further acerbate the story.
This likely negative sentiment occurs every year. Last year the choppy data in March pushed further into the year as the new central government stamped its own authority onto its decade tenure by clamping down on speculative lending and fraudulent invoicing. This policy set-up is still in place and may increase the negative reads.
However, this year I think the negative sentiment is likely to come from outside of the China story and surrounding economies to emerging markets, which have enjoyed the spoils of the mass liquidity caused by QE.
We are already starting to see specific cases of strain with Argentina and Turkey; both of which have an ever-expanding current account deficit and have taken fairly dramatic action to ‘stabilise’ the local money markets and currency.
Turkey will be the more interesting of the two considering its standing between Asia and Europe. The mass inflation the country is currently experiencing is expected to be tackled head on at its emergency central bank meeting tonight, with commentators speculating as much as 400 basis points could be added to the cash rate to stem the inflationary pressures and attract foreign investors back to its money markets after having seen a mass repatriation. The action is likely to quell current talk; however it won’t completely remove the fear that emerging nations with balance sheets that are heavily indebted may struggle over the year.
This is unfortunate, as bottom-up views look decidedly rosier then the current macro sentiment. I believe that in Australia where the market has continuously underperformed its global peers, upside potential is growing. The news from JB Hi-Fi and Oil Search yesterday certainly gave the impression the first-half numbers from a range of sectors can beat estimates. Come Monday when earnings season kicks off in earnest, be close attention will be paid to consumer discretionary, energy and big-end material plays which have either under or over performed in 2013. The results will show if this has been justified.
Ahead of the Australian open
Currently we are calling the ASX 200 up 12 points at the 10am bell (AEDT) to 5187 - 0.1% expansion. The muted moves are likely to be the results of cautious trading ahead of the FOMC meeting, where it is expected a further $10 billion will be unwound from the current bond-buying program. This may create further choppy trading in emerging markets and is likely to have a flow-on effect to the ASX, as inflows from overseas hold the line.
Once the FOMC meeting is clear, bottom-up view can take over.