So after closing out what has been a year predominantly driven on speculation around central bank policy, with the favourite macro trade being long on developed equities and short JPY and US treasuries, the key question I’ve been hearing is; can it continue in 2014?
It’s hard to see a sharp unwinding of these positions anytime soon, but clearly the easy money has been made here and it seems a low probability that we are going to see the same sort of return this time around. It’s a question of what will provide stellar returns for traders and money managers, and it seems fair to say whatever asset it is that will move significantly doesn’t seem to be glaringly in play right now.
There are a number of ideas I like in Europe, notably a continuation of the long DAX/short CAC trade, and long developed market equities/short emerging market equities should also continue in earnest, however the new big idea seems delicately poised to materialise. Politics will play as big, if not a bigger role in 2014, while international relationships - notably between China and Japan - need to be monitored as well.
Volumes terrible through Asia
Volumes have been terrible in Asia; however this fate is not just a function of lower participants in the market, but also the fact S&P futures are closed, as is the Nikkei cash market. The Chinese CSI 300 has pulled back 0.6%, failing to add to what was a good day yesterday, after reports six companies had been granted the right to IPO, subsequently putting a bid in a number of the listed brokers. The four-month low we saw in its official PMI data yesterday at 51.0 could cause some modest headwinds for growth, especially as the more forward looking sub-components of the survey also grow at a slower pace. We also saw the HSBC manufacturing PMI survey out today and that came in as expected at 50.5; again fuelling further signs that Q1 should come in at 7.6%.
On the FX side, moves have predicably been low. The AUD has been the best performer, notably against the pound, although there is nothing more than thin liquidity that needs to be detailed here. EUR/USD is fairly unchanged and, like cable, could warrant greater attention with manufacturing data due out of both the UK and Europe today. The EUR bulls will want to see a closing break of 1.3833, for a re-test of the downtrend drawn from the 2008 pivot high at 1.3885, while a move through 1.3716 (the uptrend drawn from the November 7 low) could see a deeper move to the 1.35 area. Momentum is starting to break down and it’s worth highlighting that being short EUR/USD in January is traditionally a good trade.
ASX 200 starts the year with a modest gain
Turning back to equities and the ASX 200 has put on 0.1%, which is certainly lagging the sort of gains we saw on the first day of trade in 2013 (+1.2%) and 2012 (+1.1%). Volumes through the market have actually been lower than New Year’s Eve. Gains on a sector basis have been broad-based, while overall breadth has been good, with 73% of companies up on the day. Two stocks which I am looking at closely is BHP and WPL. BHP is testing good supply at A$38.27 (the November high) and closing break of this level in the short-term could see the 2013 high of A$39.34 come into play. WPL is finding better sellers and remains a range trader’s playground. WPL could revert back to its 20-day moving average in the coming days around A$37.95 and a move to A$37.00 should present itself as a good buying opportunity for traders given how well it’s traded the sideways price action.
In terms of the European open, our calls really centre on the FTSE, given Eurostoxx and S&P futures are not open. FTSE futures are open and are 0.2% higher from the cash market close. This in theory suggests the other European markets have moderate upside risks when they open, however it’s also worth bearing in mind that the S&P has rallied 2% on average for the last five consecutive first business days of the year. Why we see such a strong performance on the first business day of the year is not immediately clear, and maybe it’s a psychological issue more than anything, but if history is anything to go by then we could see a rather strong move in US trade, which could buoy Asian markets ahead of the nine Fed speakers (including the outgoing Chairman Ben Bernanke) over the next couple of days.