Global Markets Overview – 1/14/14

The stock fundamental nervousness builds

Having seen a 30% rise in the S&P in 2013, investors are starting to ask the question that strategists and analysts have been asking since October: has the optimism that drove 2013 translated into earnings?

The reaction from Wall Street overnight suggests some are finally asking this question for real, as price earnings ratios hit seven-year highs.

I reported yesterday that of the 108 companies to report guidance changes to the market over the second half of 2013, 96 of these guidance changes were warnings, and only 13% were upgraded. Currently 17% of the stocks listed on the S&P are overvalued on fundamentals, with a further 25% at equal value. There will need to be some real surprises over the coming three weeks for analysts to change their forecasts and earnings expectations for 2014.

What might also make trade interesting over the next few weeks is that currently on the S&P there is no sector that has more than 8% short interest. After such a lean year in 2013 (having seen 30% appreciation), short traders will be looking for weakness in earnings to really drive down stocks and start their year on a higher note.

The names to watch from the US are Wells Fargo, JP Morgan Chase, Bank of America, Citigroup and Goldman Sachs. The reason for this is that the banks will illustrate if the consumer confidence figures, credit growth and housing demand reported over the June to December period has translated into credit and lending growth.

We would also expect the investment banks to report solid increases in wholesale and investment revenues, having seen the market appreciation in the US and Europe over the same period, and increased corporate activity. This week will signal the general theme for trade in the US and the globe over the next six weeks.

Ahead of the Australian open

Here in Australia we are not going to escape the sell-off seen in the US overnight. Before the 10am bell (AEDT) we are calling the ASX down 42 points to 5250; the pace and severity of the decline today will be conditional on how JP Morgan and Well Fargo's reports are taken aftermarket. They will affect aftermarket trading and the futures markets, all of which lean on investment trends here; if they miss guidance prepare for the opening calls to be an underestimate.

Commodity prices are again a place of interest as they continued to rise on the news out of Indonesia. The moves in the nickel miners should continue today along with gold plays, as both base commodities rose overnight.

However, the iron ore miners look like giving back all of the gains from yesterday and some more, with BHP's ADR off 51 cents in New York to $36.05 and that will be a point of reference of the kinds of declines the ASX is in for today.

In 2014 the ASX is yet to be up year-to-date, and if the market does fall a further 42 points this will be the worst start to a year since 2010 and will mean the ASX is well on track for the biggest decline at the beginning of a year since the very tail-end of the GFC in January 2009 - the very low of the crisis. At 5250 the ASX will have lost 102 points year to date.

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