Markets see significant falls

The markets have just come off one of their worst weeks in two years. 

Source: Bloomberg

The ASX has seen six consecutive days of losses, shedding 208 points from the high at the close of July. The Nikkei has lost 910 points in the last eight trading days, as geopolitical risk sees buyers ducking for cover.

The VIX index has crossed and maintained its position across the 200-day moving average, as option pricing ramps ups as investors look to hedge positions.

On a medium-term basis we still see the Fed as behind everything; it has been proven right consistently over the past month on its views on employment slack. The conclusion is that it will follow a very structured path on the raising of rates over the coming years.

However, on an interim-term view, geopolitics remain at the forefront of investors' decision making.

So where are the geopolitical flash points sitting?

- The Ukrainian conflict is into its final stages; over the weekend the rebels suggested a cease fire on humanitarian grounds, as Donetsk has been out power for two days and food supplies are reaching an end. Ukraine is demanding the rebels surrender before aid will be sent in.

- Russia has been calling the situation a ‘developing humanitarian crisis’. However, Germany, the US and Britain have all warned Russia that any incursion into Ukraine without the consent of the Ukrainian government violates international law and is considered the ‘red line’ not to be crossed. Surrender is looking likely and this could alleviate the markets’ concerns.

- The US struck several key ISIL sites over the weekend. The news on Friday from the White House saw Asian market spiralling, however reactions from Europe and the US suggest that the markets are more concerned about a ground offensive. President Obama stated clearly that this will be a medium-term conflict and that its likely to take months not weeks and that he has no intention of sending in troops. There will be ebbs and flows in the risk-off trade from this situation, particularly if the air strikes need ground support post the strikes.   

- Gaza: another 72-hour ceasefire has begun, with negotiations under way in Cairo on way to end the conflict. The conflict is approaching a month in duration, with causalities in the thousands; the hope is this round of negotiations will produce a more lasting accord.     

The conclusions from the weekend are that conflicts are cooling, and the risk-off events of the past two weeks may see upside risk as de-escalation spreads across the conflicts. Underlying data in the US has been positive, however European data has not.

Australia has just seen a week of pretty bleak forecasts and poor actual data; unemployment is now at its highest level in 12 years as the RBA’s monetary policy suggested that mining may need to close high-end cost curve mines to counter the oversupply issues in the market.  The central bank also cut its growth and inflation targets as the fall off in part of mining filters through and wage inflation drags on the inflation levels. In short, ‘a period of stable rates’ is here to stay; ‘lower for longer’ is becoming a global central bank theme as the ECB is in no position to move, nor is the BoJ.  

Ahead of the Australian open

Based on the close of the futures market from Saturday, we are calling the ASX 200 up 0.9% to 5489. The upside is likely to be broad-based considering banks, materials and energy plays have seen board selling and have fallen into oversold territory.

Earning season rolls on today, with JB-HiFi and Bendigo Adelaide Bank reporting full-year numbers. However, most investors will be waiting for Wednesday as CBA reports another record profit. 

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