Market strategists calling out overvaluation

The macro issues of the pass two weeks have begun to fall out of markets’ thinking; however the issues in Eurasia and the Middle East are being closely watched. 

Source: Bloomberg

Overnight night the Israeli-Palestine conflict reignited after both sides accused each other of not adhering to the July 25 ceasefire; hostilities have resumed seeing rockets being shot across the border once more.

Putting the ugliness of the current conflicts to one side, what has been building (and it has been for a while )is strategists and analysts alike are now screaming out about overvaluation in the equity and bond markets and a pullback is not only due, but needed.

Goldman Sachs is the latest to join the chorus, having seen Nomura, Morgan Stanley and UBS all stating in some shape or form that markets are above fair value. Goldman is stating the obvious when it suggests that growth acceleration is now behind the market and the sustainably stage is now in effect.

What the bank is pointing to over the coming three months is the likely rise in government bond yields, which would prompt a sell-off in bonds which is likely to flow through to an equity slide. The expectations of movements from the Fed are building, and a rate rise is becoming a risk (one we don’t see as materialising in mid-2015).

We will likely see a lull in trade over the coming months as the excitement of earnings season settles down and expectations of how the market will trade post the FOMC October (which will see the end of asset purchasing programs) affects trading mentality . 

What is also likely to drag on equity prices in the interim is multiples are still evaluated despite EPS growth from the current quarterly earnings season being at a double-digit rate. However, Friday saw a disappointing number from Visa and the aftermath in actual trade from the larger-than-expected losses from Amazon, which severely dragged on markets.

With Visa the number one weighted player on the Dow, the 100-point drop is easily explained, but weakness was also seen in the S&P after having reached another record high which is likely to affect confidence.

This week sees US releasing six major market drivers, with the likes of GDP, non-farm payrolls, ISM Manufacturing and the Fed decisions. Watch for a possible third reorientation on estimates from the Fed on Thursday morning as inflation and growth numbers are likely to change once again and this will affect estimates of when rates will move. 

Ahead of the Australian open

Today is fairly light on news that will really drive the ASX, meaning the futures from Saturday night are likely to come to fruition on the open. Based on Saturday’s close we are currently calling the ASX 200 down 14 points to 5569 after the six-year high from Thursday.

Earnings season continues today with Leighton releasing its half-year number as education provider Navitas releases its full-year numbers. Having seen it lose its 18-year deal with Macquarie University only four weeks ago, and losing over 30% on the day, the company is in need of good news; however the market will be wanting news on future guidance which might offset this loss.  

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