It’s a very rare thing to see the US markets underperforming the rest of the world, and this does provide market upside.
European markets have seen year-to-date growth since mid-January; Asian markets have been mixed but are up year-to-date; and the ASX has had a stunning turn-around since the end of January low to jump up as much as 8% to be 1.6% higher year-to-date.
Earnings season has been mildly positive with the biggest story to emerge from the season being the jump in cyclical plays that are outperforming the broader market, as better-than-expected earnings coupled with improved guidance see investors returning to the old names.
The question now is that with the ASX touching the six-year high seen in October last year, where to from here?
There are two factors that could push it in either direction: the China story and the US story.
On the downside, first and foremost March is dividend month, with around 50 points in total being taken out of the market; with FMG, BHP and RIO all rallying over the past four days on talk of ‘income’ pickups (which I find hard to take). However, iron ore is now at its lowest level since July last year, and at $119.90 the level to watch is $110 - the low in June - and this will place current guidance under pressure.
Plus, the news out of China yesterday certainly put our market into a spin, with Chinese markets plummeting on the worst house price index in eight months. There is rising speculation that shadow banking will see more defaults, and steel demand is likely to slow dramatically on the news. This is likely to drag on the cyclical space which has driven the ASX over the past four months. There is a case to be made for downward pressure
However on the flip side, the strength out of the US for 2014 has only just started. There is a real sense that the US markets are starting to accept the unwinding of monetary stimulus, and that current macro data is economically supportive, which is transferring into company results having just seen a very solid US earnings season. US market upside is coming.
If the US markets can find value, and with the current market trading at 14 times forward earnings (even after a 30% increase in 2013) it’s wanting be considered expensive. The support coming from the US markets could override the concern being shown for the macro issues in Asia.
The next three weeks will be a push pull event, and it is likely the 5457 level will be a roof for a possible leg higher. Be prepared for flat trading as the ASX hits a cross roads.
Ahead of the Australian open
Again there is not huge amount of macro news affecting today’s trading session in Asia; however the news from China is likely to be played out again and could drag on what looks like very solid leads for the overall markets.
We are currently calling the market up 23 points on the 10am bell (AEDT) to 5467 which will see it move through the October high and create a new six and a half year high. I am wary however of the issues facing Asia, as questions are raised about China which may lead to a slightly lower opening than currently being expected.
Earnings season continues today with one of the most US-exposed stocks - QBE. However, this has been a major drag on the company over the past three years and I would not be surprised to see more bad news from its US assets.