Investors look domestically

The quiet November trade period continues to leave the market to its own devices.

Source: Bloomberg

The US markets opened and closed largely unchanged to see the DOW and the S&P just resting against the record prints from Monday.

US markets are looking for any reason to head higher. I see the S&P closing above 2040 by the week’s end, as the limited macro news will focus attention on corporate earnings from the past three weeks.

The lull in the macro news is also forcing investors to really look inside each domestic market to find trades, value or momentum. Asia is presently the perfect case in point.

The Nikkei and USD/JPY look like superb trading plays in the current environment. The support from the Bank of Japan through the increased stimulus program is back-stopping USD/JPY and increases the market’s confidence that the BoJ will act if needed. The extra ¥10 trillion announced last week, taking the total program to ¥80 trillion, keeps the BoJ’s mandate of supporting inflation at all costs. At the same time, it single-handedly devalues the currency to increase competitiveness – monetary policy side looks locked.

On the fiscal policy side, Abenomics has been in play for almost two years and the three arrow strategy is slowly but surely crashing its way through decades of entrenched industrial and fiscal structures. In the main, it has worked well (in parts). However, the longer term effects are up for debate and the everlasting legacy of the program is a danger to the economy in the years to come.

The program looks like it will continue and there are also very strong suggestions coming out of Tokyo that Abe may call a snap election - most likely for November 14 - to build on his mandate. Although his disapproval rate has fallen to 38%, his political opponents are in disarray giving him a very high possibility of winning and further strengthening his right to carry on with his third arrow strategy. Both the fiscal and monetary policy in Japan has seen the Nikkei to plus 17,000 points and that doesn’t look like slowing down. The Nikkei and USD/JPY remain key long plays over the next 6 months.

Moving to Hong Kong and Shanghai and the opening of the Share Connect program next week has seen the Shanghai Composite surging to four year highs. This is unlikely to slow down, as the market gears up for the expected increase in trade and exposure to foreign funds.

The fact that a date has been set, shows Beijing is committed to the program and is a very positive step forward for the region. We are also watching the Hang Seng and the Shanghai Composite for upside over the coming few weeks, as the program takes effect.  

Ahead of the Australian open

Unlike its Asian neighbours, the ASX doesn’t have a major macro driver but it does have a fundamental drag on a quarter of its index. What is transpiring in the commodity space is going to lead to further write downs and even possible closures of mid-cap and junior plays and that will rattle confidence.

The falls in Brent, iron ore and gold are going to squeeze high cost producers to breaking points over the coming months and it’s an area of the ASX that is likely to underperform. I do see some possible relief in December and January as some restock takes place but the fundamentals do appear to be against iron ore, in particular, and gold is likely to suffer from investors demand for USD-exposure. I see the ASX stuck in a range, as the defence plays can only do so much capping any major upside as cyclical material plays lag.   

We are calling the Australian market down a few odd points to 5515. However, the market is likely to continue to react to commodity prices and the sluggish earnings growth profiles emerging.

Wage inflation data will also be keenly watched here in Australia, today. The AUD normally ignores the wage data. However wage growth is becoming a concern for economists and the RBA which has started to flat line. Lower wage growth leads to lower consumption and sentiment. If the read is soft, watch for more talk of possible rate cuts in 2015 - however unlikely that might be.

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