Japan has continued to be a focal point, with many hoping for some kind of pullback to work long Japanese equities and Nikkei future positions. The 14 December election could spur volatility in assets, especially with the FOMC meeting just days after. One-month USD/JPY implied options volatility is currently at 10.89%, which is still below the five-year average of 11.5%, so I believe buying volatility may be worth looking at.
We can also throw in sentiment towards Greece, with 18 December the last day that Greek officials can achieve an agreement with the Troika and a Eurogroup Working Group for what many in Greece would like to see as the last tranche of aid. An agreement could (in theory) be the transmission for the market to focus much more closely on political issues in Greece, which of course start in February with the presidential elections.
US data has once again shown us why everyone loves the USD, with a 40 basis point positive revision to US Q3 growth (to +3.9%). This was courtesy of a smaller contribution from inventories, with final sales being revised down as a result of lower net exports. A lower consumer confidence report was also seen, but this matters little as the trade continues to be long equities and the USD. I still feel the risk of a clean out of positioning in EUR/USD and USD/JPY is materially high.
US inflation in play today
Perhaps weakness in today’s US core PCE (expected to be unchanged at 1.5%), personal income and spending and durable goods (0.5%) could be the catalyst. However, it seems to me that any real correction here will come from the EUR side of the equation.
It’s worth highlighting that funds are running the second-lowest short positions in S&P 500 futures for the year, while a scan of the S&P 500 cash market shows 88% of stocks are now above their 50-day moving average. Bear in mind this figure stood at 13% in mid-October, so it shows the broad-based gains of late. Whether the market internals actually result in a sell-off is debatable, as there are still 20% of companies trading below the 200-day average. It does suggest that a short-term move lower of 3-5% would be healthy for the next stage of the bull market to materialise, especially with the US index trading at peak EBIT margins.
Europe and Japan still look like the best destinations to be invested if one is to take a 6-to-12 month view. There are comparatively compelling valuations, good upside to pre-GFC EBIT margins and central banks that are effectively using the stock market as a vehicle to promote aggregate demand. Still, if the internals of the US market were showing signs of caution, in Germany 93% of companies in the DAX are above their 50-day, the second highest level over the last couple of years. India looks like a thing of beauty for trend traders as well, although there are a few signs momentum could be waning, while the China CSI 300 (+0.8% today) is also powering ahead.
The ASX 200 seeing better days
The ASX 200 has broken the November downtrend, although volumes are fairly light and there doesn’t seem to be one glaring catalyst. Australia’s economic data continues to show worrying vulnerabilities, with Q3 construction work falling 2.2%, following on from a drop of 1.2% in Q2. Even the finer details were poor, with all categories in the survey falling. Tomorrow we get Q3 CAPEX, with consensus expecting a 1.9% fall on the quarter. What’s more, this consensus seems to be held up by one house calling for 3% growth, with all other economists expecting no change down to a 6% drop. The key, though, will be the fourth estimate to 2015 spending – a number lower than $145 billion should bring out further AUD bears.
AUD/USD closed below the 7 November low of $0.8540, which looks to be important from a technical perspective. There will be some momentum-focussed funds adding to shorts on that development, although they would have hoped to see a further fall today in iron ore futures and the Chinese market. The swaps market is pricing in around a 50% chance of cuts over the coming 12 months and I think this seems about right. While everyone is focussed on the Japanese, US and European economies, I think Australia could be the economy to watch most closely in 2015, judging by current market pricing.
It also worth pointing out that the spread between the Australian 10-year treasury bond and US 10-year bond has dropped to 88 basis points. This is approaching similar levels as we saw in August (85bp) and shows a trend in US economic outperformances. Australia’s bonds have commanded a premium over the US since June 2000, so this could be a key them for 2015.