Global Markets Overview – 1/23/14

US markets have provided no platform for Asia to move higher, so it seems we will need to see China come out firing again for the ASX 200 to make any upside traction.

This seems to be the trend with the ASX 200 - finding buyers just before the open of the Chinese futures markets at 12:15, and again when the cash market and money markets really fire up shortly after. It appears we're heading for a negative open for the local market, with traders potentially non-committal in terms of placing buy orders.

US earnings have started to improve in terms of the levels of beats against consensus, with 70.4% of the 18% of S&P 500 companies who have reported beating on the bottom-line, while 64.2% have beaten on the sales line. From a pure growth standpoint, there is a reasonable disconnect between the 13.6% aggregate earnings growth and the modest 2.6% aggregate top-line growth seen in Q4. If traders wanted to see top-line expansion and not just one-off factors to boost underlying earnings, they aren't finding them at present. Hence when you have a US equity market trading on a P/E above the five-year average, earnings and guidance are so important. Keep an eye on Baxter who reports tonight for a potential catalyst for CSL tomorrow.

Weaker open expected, with NCM, PNA and STO in focus

A weaker open is therefore expected in Australia; given BHP's ADR we should see materials at the heart of any move lower. Newcrest Mining, PanAust and Santos report production numbers, although NCM has already pre-announced December production figures last week, so traders will be keen to keep an eye around costs and of course any changes to its debt profile. In terms of price action, the inability to continue its ascent after closing (for one day) above the 38.2% retracement of the 51% sell-off from August to December at A$9.71has been noted. The subsequent pullback, mixed with a lower gold price could see short interest pick up.

Santos needs a catalyst either way right now, because if you look at any of the short- to medium-term moving averages, it's clear the stock is trading sideways. This is fine from a pure trading perspective and thus trading a range of $14.75 to $14.09 is preferred in this environment (I use Bollinger bands here). Interestingly natural gas spiked over 6% overnight, however the correlation between STO and WPL with natural gas or Brent is very low right now. It's worth highlighting that the correlation between WTI prices and the USD is now positive and very rarely over the last five years do we see this take hold.

Looking at stocks on the move, it's worth having a look at Goodman Group (GMG) and Macquarie Atlas (MQA), who are exerting good underlying strength. Filtering for stocks that are trading at a thirty-day high, top of their Bollinger band, with the five to twenty-one day moving averages heading higher and the MACD trading above the signal line, these stocks fit that bill and it will be interesting to see if momentum continues to push them higher.

In terms of data, the market will be keen to watch out for China's HSBC flash PMI data (12:45 AEST) and December leading index (13:00 AEST), while it's worth keeping in mind that we get manufacturing and services PMI in Europe tonight. With falling inflation firmly on many traders' radars right now, we need to see further evidence that the cyclical recovery is under way or we could really see the EUR coming off.

China's money markets could stay in the spotlight and it's interesting to see the ever-falling correlation between the Chinese mainland equity markets and the AUD. AUD found strong buying against the Canadian dollar, with Bank of Canada going out of its way to keep the CAD's weakening trend in play in its central bank meet overnight. However, against the greenback, the AUD found good selling at the 38.2% retracement of the January 13 to January 20 sell-off at 0.8888. It seems that while the market now believes that rate cuts are off the table (although Goldman Sachs still sees one in March), many don't feel that trimmed mean inflation at 2.6% is a game changer, with much of the inflationary forces coming from weather-related food inflation and holiday-linked costs. The fact that the swaps markets is pricing in six basis points of hikes over the coming twelve months seems about right.

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