Global Markets Overview – 12/6/13

Is the Santa rally coming to town?

For the fifth day in a row the US has finished in the red.

Europe is in the same boat, and the ASX experienced a $6.4 billion turnover trading day yesterday, which saw the market finish on the low of the day and the week; the index is 79 points away from the quarter low.

This to me signals one thing - profit taking a flight to safety. The ASX remains above the yearly growth average (just) at 12.75%. We have seen a return to confidence and the wall of cash that had been locked up so tightly over the past four years is breaking down, seeing inflows into the equity markets, as debt instruments, money market accounts and precious metals also break down.

However, we are now in a situation where the US has seen year-to-date returns of 25%, Japan has had a massive year up 48% and Germany is higher by 20%; profit is glaring and angst is returning.

Many in the equity world are talking about the Santa Claus rally heading into Christmas and New Year. Historically, December is a positive month for the world over. The ASX in the past 20 Decembers has risen 16 times, with an average gain of around 3.6%.

However, on current trends it is hard to see December 2013 having that kind of move. I understand that come Wednesday next week the banks will pay out the dividends from November, and this will see over A$14 billion returning to investors.

However, the data from the US and Europe does not look equity constructive. The better-than-expected US GDP print last night was well ahead of expectations at 3.6% on an annualised basis. This jump in actuals can be explained by the upward revision of inventory accumulation, which is estimated to have added 1.6% to overall GDP. Now you could point to this being a negative as an increase in inventory could mean sales and/or turnover is stagnating, however the inventory-to-sales ratio was unchanged suggesting business confidence is driving the pick-up in GDP as forward-planning by US companies hits the retrospective data. I would expect this to normalise over the fourth quarter, however there is no denying US optimism and economic growth is accelerating.

This all points to tonight's employment data. One of the two mandates the Fed has for QE is employment and although it is looking for an unemployment rate of 6.5% (and why I think the December 17 to 18 meeting will be a non-event), any signs employment is accelerating faster than expected mean the timing of taper will come forward, and that is being taken as equity adverse, and will drive these markets lower.

Europe is also marking calls that can be seen to be equity adverse. The ECB last night sounded rather hawkish in its statement. It appears the ECB is unwilling to move rates into negative territory, despite the threat to do so; it believes Europe is in for prolonged inflation, which saw the EUR jump and Frankfurt and Paris contract. The momentum of the last week looks unlikely to change considering the DAX has made record highs all the way to last week and this is why Europe is unlikely to see a Santa rally.

This is why I believe the Santa rally may not come this year, as profit taking, Fed fears, questioning of company earnings coupled with general sentiment all points to at best a flat month. I would even go as far to say a negative month looks highly likely, as volumes will drop away the closer we edge to Christmas and investors start to leave their desks.

Ahead of the Australian open

At the close of the US session tonight, the AUD will log its seventh consecutive loss, making the week equal the record seen in 1997. This is a bright spot for the RBA and the local economy however it has been unable to hold below the 90 cent handle and is yet to be market supportive.

A falling AUD will benefit the local market; for a long time the AUD and the ASX were in log-step, that relationship has since broken down and the inverse has now taken over.

Investors are looking to cyclical stocks with USD tailwinds for reasoning to drive the market higher and why an iron ore price in AUD terms above $150 a tonne should become attractive as the defensive trade breaks down on overvaluations and overcrowding.

Ahead of the open the ASX 200 looks like it will continue the downward momentum of the past three weeks, opening down 13 points to 5183 (-0.26%). Since the October high the market has contracted 5% and the calls for it to finish at year-to-date highs look overstated and overestimated.

I believe that fundamental investors are finally catching up with the market (they are always six months behind the actuals), and one thing I have been questioning for weeks is whether P/E expansion is justified. So far the jury is out on that call and this may explain the cautious trading and profit taking heading into the half-year reporting season.

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