Global Markets Overview – 2/20/14

Asian markets look set for a modestly weaker open, although if you look at a number of the momentum-focused indicators in Australia, dips should still present themselves as buying opportunities.

A number of big money managers must have had a bad lunch yesterday, because the market really started to roll over just after midday; however it was good to see a strong final hour with the market finishing above 5400. That goodwill should give way this morning, with our opening call just below that figure, so it will be interesting from a psychological point of view to see if the bulls come and support prices. After a 7% rise in the market since May 2, perhaps a few money managers will be looking to take some off the table, and an upside break of the October high of 5450 seems tough going in the short term, especially given the good selling that came into the market around 5420 yesterday. A period of consolidation looks likely.

A big day of earnings

Earnings come in thick and fast today, however while we get the likes of Fairfax and Leighton Holdings, the combined weight on the broader market is fairly low, so we may not see the same sort of moves you would get if BHP or CBA was reporting. 50% of ASX 200 companies have reported half-year results thus far and the beat/miss ratio has steadily improved, and now sits at a respectable 50% on the EPS line and 47% beat on the revenue side. Perhaps more importantly though is the 27% aggregate EPS growth seen against the corresponding period, while the top-line has been grown by an aggregate 4.5%.

If you look at the internals, currently 78% of companies in the ASX 200 are trading above their shorter-term 21-day moving average, which highlights the underlying strength. This figure was around 14% ten sessions ago, so it shows the fairly rapid broad-based price moves in this time. This percentage is also around the same level we saw back in October, however if you look at more traditional overbought readings, there are no glaring signs of a big reversal due anytime soon.

Gold stocks should see consolidation today, although had you told any money managers that six of the best performing ASX 200 stocks in 2014 would be gold plays, I'm sure they would have questioned that. But it's clear that the dogs of 2013 seem to be working nicely this year. Gold is down a touch from yesterday's close, as is iron ore, so it's hard to see stellar upside in this space today. Northern Star Resources (NST) is the best performing stock year-to-date and good earnings (out today) are clearly needed to try and push this stock above yesterday's high.

Price action in the S&P looking a little dicey

Looking at offshore influences, traders need to bear in mind that price action in the S&P 500 was fairly shaky overnight, although the Fed minutes didn't really provide any major catalyst and the market was already falling into the announcement. The fact the S&P has failed at the all-time high could be significant, but on current news flow, there's certainly no reason to panic and it is clear the Fed still sees the economy evolving in-line with its current projections. Still, a slightly firmer USD has been seen, although it's worth bearing in mind that the Fed funds future is still only pricing in 59 basis points of hikes from the Fed by December 2015, which is sixteen basis points below the Fed's own consensus. So the market is fair way away from testing the current forward guidance, which looks like it will be changed anyhow.

Keep an eye on price action price action in Japan given we get the weekly MOF (Ministry of Finance) fund flow data at 10:50 and just before the open, while in China we get the HSBC flash PMI data. This manufacturing read is expected to remain unchanged at 49.5; recall this metric caused a reasonable reaction in the markets last time around given the contraction in a number of the forward-looking indicators such as new orders sub-component. Traders are still trying to reconcile the huge discrepancies between the HSBC and official PMI exports orders sub-component, which was weak in the previous reading and the official trade balance figures which showed a big jump in exports. Still, a number below 49 could see the ASX 200 and AUD retreat into the afternoon.

All-in-all it promises to be a slightly weaker open, however there is plenty for stock pickers and more macro-focused traders to sink their teeth into and we should learn a lot more about the psychology of the market after today's trade given the good run of late.

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