Global Markets Overview – 11/14/13

Bounce back or a dead cat bounce

When the five largest stocks (which make up over 30% of the ASX) contract by one per cent or more, a 1% plus contraction will also occur, considering the market that has very little diversification.

After a solid contraction on the ASX, down 1.37%, overnight saw US risk sectors move higher as retailers, steel makers and electric car newcomer Tesla all bounced strongly on the prospect of what Professor Yellen might say tomorrow morning for Asia as she testifies in front of congress.

Fed chatter will dominate trade in the next 24 hours as Ben Bernanke also speaks today, however his speech will mostly likely be pretty light on market-affecting statements.

The other interesting aspect headlining today's trade is that the ASX is still soft; it is pointing higher, however only by a handful of points, even after record prints in the US.

If risk asset leads from the US can't excite trade in the ASX then there are a few conclusions that can be drawn.

First is the current contraction may have a bit more sting in the tail than I first thought.

Second, that the buy side may be full exhorted in the short term. That point was illustrated by the fact October saw the lowest trade volumes (excluding January which for seasonality reasons is always the weakest) of the year and November is also pretty soft by historical measures.

And thirdly, value is now becoming very hard to find, and that is an illustration of missing value conviction - not a bad thing but would suggest interim trading will more often than not be red, rather than green.

I need to put this call into perspective with what has been a terrific year on the local market.

Year-to-date the ASX is up 14.4% (having been as high as 17.5%) - this is well ahead of the yearly average and is still on track for the best yearly gains since 2009.

However it's the sectors that illustrate why the ASX is taking a breather.

Year-to-date financials are up 23.9%, telecommunications (as known as Telstra) +18%, healthcare +19.3% and consumer staples +13.85%. The best performing cyclical space is consumer discretionary, up 33.4% (overall leading sector), followed by energy +11%. Compare that to the materials sector, down 4.9% year-to-date.

The biggest moves into the red over the last two weeks have been the banks and financial services, which is unsurprising considering three of the big four are trading without their dividend and historically drift lower between ex-div day and actual payday.

A 23% gain (to the close of yesterday's trade) is a stellar year by historical standards and profit is glaring. Total returns heading into the year's end are no doubt being discussed by hedge funds to fund managers to institutional traders, and that is why I suspect trade to continue to wane in the interim.

Remember total returns are how these managers' performance is gauged, plus they trade with a 12 month view and the question is; can the banks go higher from here?

They certainly can - lending is picking up, credit growth is starting to shift to positive territory and costs are contracting, record profits should continue and that will entice yield and capital return investors into the big four.

However, at current prices, interest in the four is dwindling and that will most likely see the index contraction hanging around till the start of December when dividends actually hit investor accounts.

Ahead of the Australian open

Ahead of the open we are now calling the ASX 200 up 33 points to 5352 (+0.62%), having been a very flat call of 5333 pre-Janet Yellen's prepared speech.

The speech contains a very bullish lead for risk assets and emerging markets; and that is her view on the state of the US economy.

"We have made good progress, but we have farther to go to regain the ground lost in the crisis and the recession," Ms Yellen said.

"Unemployment is down from a peak of 10 per cent, but at 7.3 per cent in October, it is still too high, reflecting a labour market and economy performing far short of their potential.

"At the same time, inflation has been running below the Federal Reserve's goal of 2 per cent and is expected to continue to do so for some time."

That statement alone has changed the landscape of trade today; the ASX will jump back on those comments and would suggest tapering is more likely to stay as is until the last part of the first quarter in 2014, rather than the earlier calls for December or January made by some analysts after very strong jobs numbers last week.

It might also prompt the RBA to talk down the AUD again. Having fallen for four straight days, the AUD will pop on this announcement as the USD falls against all major pairs.

BHP's ADR is matching flat, with the lead indicator suggesting the stock could add 6 cents the $37.69 (+0.16%) even with iron ore sneaking up to $136.10. However the Yellen statement will change this call.

The caution I have suggested since the start of the month will be short lived as December is very much a set-and-forget month, with most taking extended holidays over Christmas and the new year and now risk being supported by the continuation of the Fed stimulus.

However, heading into first half earnings this may change as fundamental investors start to question the P/E expansion of the last five months.

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