ASX winter wonderland in a for a spring clean

At the start of June we predicted the ASX was in for a winter wonderland.

At the time of writing on June 3, the market had lost 313 points in two and a half months and opened winter at 4926. It continued to fall in June to the low of the year of 4632 on June 25.

In the June 3 article we did ask the question whether winter would be a winter wonderland or a winter north of the wall, and when the market fell through 4649 on June 25 (which is where the ASX started the year on January 2) there was a real possibility of things getting very ugly as confession season continued and ‘taper talk’ became a reality, leading to red on every screen.

The China story continued to be a moving target for markets as very uneven data suggested it was in for a bumpy ride in 2013. The newly elected central government started to squeeze out speculative lending and cracked down on invoice fraud. The result was for a mass spike in Chinese funding rates particularly the 30 day and 60 day rates and a mass selloff in the Shanghai composite. For a market such as the ASX that has 23% (material plays) of it tracking the comp very closely, a winter north of the wall looked highly likely.

On June 25 BHP hit its year to date low of $30.43, as did FMG ($2.87), NCM ($9.07) and RIO ($49.81). Iron ore prices at the time hit US$110 a tonne and gold looked completely cooked; dropping under $1200 an ounce and hitting $1180 as the investment currency USD exploded and the store of value looked pointless as US market took off. Predictions were made of iron ore crashing to US$80 a tonne by FY15 and in the short term US$100 a tonne was expected by August/September. So what turned it around?

At the end of June, reports emerged of the Chinese snapping up as much iron ore as they could get their hands on, at US$110 a tonne the raw material’s demand skyrocketed. Lending stabilised as CPI came in was well below official expectations and GDP looked to be head for sub 7% prints. This prompted Premier Li Keqiang to announce that the central government would not permit China’s GDP to fall below 7%. This caused mass buying in the cyclical space and since the low BHP has added as much 23% to its share price with FMG the stand out, up a massive 58% from its low to its high.

The return of the cyclical plays was one of relief for a market that is heavily overweighted by a financial service sector that has been in the driver seat since June last year when Europe put a stop to its faltering economic zone.

By early July the market was back in the green for the winter months and with earnings season fast approaching, confessions factored into analyst forecasts and with US data getting stronger sending the S&P and the DOW to record highs, investors happily ran back to the local equity market.

A second RBA rate cut saw term deposit rates and other interest based instruments falling to rate levels most investors have never seen, the rate of return became unacceptable; forcing investors back to the equity markets as they start to hunt for returns.

With the markets now humming along with commodities soaring, the AUD falling below parity and continuing to fall, all positively affected bottom lines and with all attention on the cyclical plays, the defensive stocks fell under the radar.

However, looking at the winter lows of CBA $64.80, NAB $27.55, ANZ $26.30 and TLS $4.50, they have all added at least 15% with NAB the stand out; up 19% since its winter low. These players alone make up 20% of the ASX, and despite talk of the cyclical stocks being the driver of the winter rally, once again it’s the defensive plays that have done a lot of the lifting.

With earnings season producing a six out of ten result, with the word ‘consolidation’ dominating the season, 52% of companies managed to beat expectations on the earnings line. The ASX managed to completely outperform lead markets on bottom-up views as the DOW registered its worst month since May 2012, and with the S&P not far behind it both experiencing three major down weeks as the September Fed meeting approaches, the Syrian crisis got bigger and the summer holidays saw investors away from their desks.

The August month for the US has put the ASX in a very awkward position, closing at 5135 (a 4.2% return since June 2) and it appears the market could be in for some spring cleaning. The news out of the US is only going to get more volatile, and the Syrian crisis is getting stronger, with President Obama putting a possible military strike to a vote in Congress.

Emerging markets are under credit pressure with ballooning bond yields and trade deficits at record widths. As a pseudo play to the Asian story, the AUD and the ASX look to be under pressure. The ASX is due for a pull back, and considering the August outperformance, it is in the firing line.

However, once more China has managed to produce solid PMI data over the weekend with the official release on Saturday printing a stronger than expect expansion of 51, and with the final read of last week’s HSBC PIM data due today (which is expected to be revised up) it might mitigate the expected falls today.

Ahead of the open, we are calling the ASX 200 dead flat at 5135; this is a very strong start considering 14.5 points will come out of the market on the open with several stocks turning ex-dividend and the poor finish in the US. BHP’s ADR is suggesting the security will lose five cents on the open to start the week at $35.70, however it is set to turn ex-dividend and may fall further.

With so much macro news affecting the market, a quick spring clean will be beneficial for the local market before one last push at the start of summer.

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