Macro themes still setting the strategy

Final day of the quarter for Asia, so expect some very strong and boisterous moves across the region.

Source: Bloomberg

Tomorrow will be just as strong considering the penultimate day of trade for the quarter in the US saw a 1.2% bounce on China housing stimulus.

China will be a major mover of Asian markets today. The changes in policy yesterday may now need to be factored into the macro strategy after People’s Bank of China Governor Zhou Xiaochuan along with Premier Xi Jinping moved jointly to bolster the Chinese housing market.

Tax cuts, reductions to down payments on second homes, along with further moves to requirement ratios have all been introduced to assist China’s slowing housing sector and will be a medium term positive in the global growth story.

This news only adds to the macro composition that remains in lock step with our market strategy base case:

And the base case remains:

- USD strength – being leveraged to the USD earnings or direct currency exposure remains highly advantageous

- Bond yields remain at record lows due to the record low cash rate environment. This is forcing more and more institutional funds into the equity markets and increases the underperformance in this space

- Global inflation remains at the bottom of central government expectations and disinflation remains a real concern

- Growth remains elusive across the world

- Central bank taps are still well and truly open – even with the Fed looking to tighten, easing is still at record levels from all corners of the globe

- Commodity prices remain locked in bear markets

And now a possible new macro theme

- China moving back towards stimulus to prop up domestic growth

We are hearing plenty of calls to go short the banks, go short the yield trade and go long bottom of the cycle material calls. The reason is ‘now is the time’ to position oneself for the upswing in cyclicals due to the bottom of cycle commodity prices.

The calls suggest moving now, I see this as a risky move, contrarian positioning has been punished in the first quarter of the year and I see no signs it won’t be hit again in Q2 - ride the momentum and direction the market is moving; the macro themes are telling you so. The China news coupled with the fact the interbank market’s expectation of a 25 basis point cut from the RBA is now a certainty (pricing in 109.2% chance) will only assist this view further.

Whats more interesting for this strategy perspective is the market is pricing in a 57% chance of a 50 basis point rate cut come May. A move away from the yield trade in the next two months is likely to be the wrong one. From a bottom up view Westpac, NAB and ANZ all report first half earnings at the end of April/start of May and will disperse their dividends in mid-May. All three are paying a net yield of over 4.6% for a gross yield of 6.43%.

I am also not certain the cyclical bear market in commodities is at the bottom of the cycle. There is a real possibility of a further down leg as the mass stockpiling enters the supply chain on prices creeping higher. Oil and bulk commodities remain vulnerable to this risk.

Ahead of the Australian open

We are calling the market up 52 points to 5897, as it looks to close out the quarter. Currently the ASX 200 has added 8% in 2015. A very good moved compared the US markets which are treading water for the year. However, it’s a long way off the DAX which is up over 21% year-to-date and will log its best quarter since 2009. 

As mentioned, trade today will be boisterous, and likely to see contradictory moves inside sectors as managers balance the books. Ignore the intraday moves and concentrate on your Q2 strategy, which is to maintain your Q1 strategy.

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