The reason most want 2014 over is the surprise trading that has arisen over the year, which has given the market a general sense of unease.
Yet equities continue to grind on as the S&P made another record high last week, finishing the week just slightly below at 2039.8. The DOW remains within reach of its record highs, while European and Asian indexes fluctuate on domestic drivers and currency trades but remain mostly in the green in the year to date.
The unease comes from commodity bust ups and macro themes. For example, no one was predicting a collapse in the oil price and that has certainly caught most off guard – the inability of OPEC to coordinate has seen the price in free fall. The production war in iron ore is also at its pinnacle, which is driving down prices and squeezing junior players to breaking point, in turn making the cyclical spaces very unpredictable. Value in the energy and material spaces has be created and lost in days and weeks on bottom-up and top-down news, something that is unlikely to slow down in the remaining six weeks of the year. The slide in both oil and iron ore is not over yet.
What also created uncertainty in 2014 was the high-growth sell-off in mid-March. Boosted-up high-growths plays saw the fast money from six years of QE move out on rate expectations as the program ended. As the macro theme developed, investors began to question fundamental valuations that had reached three figures and the astronomical returns required to back pricing.
The market revisited this theme in late September and early October (which, I might add, has now been completely retraced in the US). Volatility and trade (excluding the extreme events of 2009, 2010 and 2011) were at a 10-year high. That sort of trade remains only a flash point away, which may either be either a macro policy change or fundamental value topping out.
I still believe 2014 will have one more surprise in store before the books are closed. Considering the S&P is currently trading on 17 times earnings and edging higher still on little or no news, the final disturbance is likely to come as the ‘bright spot’ in the world economy touches its full value.
Ahead of the Asian open
Today is a very big day for Asia. The Hong Kong Shanghai Shares Connect program opens for business this morning, creating the second-largest exchange in the world – this is likely to see a massive increase in fund flows to the region. There may be a few teething issues in the first week as the system sees above-normal trading volumes hit the books, so be aware there may be the odd random trade move. However, this is a very positive step forward and the value creation from this program is almost unquantifiable in the long term.
The other major news in Asia today (and likely this week) is Japan’s GDP and the outcomes from it. The year-on-year estimates are for 2.1%,and 0.5% quarter-on-quarter. This slightly higher growth print is unlikely to be enough to hold off the Abe government postponing the proposed consumption tax increase due in October 2015.
The final meeting of the panel examining consumption tax is due tomorrow, where I suspect it will conclude this is the right course of action, intensifying the media speculation that a snap election will be held on either Sunday 14 December or Sunday 21December. Japanese media has widely reported that the Shinzo Abe government could dissolve the Lower House and call a snap election by year-end. Despite several ministers denying this fact, the political news coming out of Japan makes it seem that this scenario is very likely. I believe it will be announced this week.
Based on the close of the futures market on Saturday, we are calling the Australian market up 10 points to 546, having logged its first print in the red in for four weeks. I suspect the ASX will bob about this week, as energy and materials look to find support, while the banks continue to trade ex-dividend and an overlay of concern about the housing market is reported in the press.