Global Markets Overview - 2/7/14

Global Bounce

The Dow and S&P saw a strong bounce overnight, which started from the opening bell and carried through to the close, registering their strongest gain for the year.

Street talk is putting this down to the employment change, which came in at 331,000 claims - 6000 less than expected; however I see this as only part of the story and believe there are other reasons for the rally.

Since January 15, the Dow has contracted 6.12% from the intraday high to the intraday low; of the past 13 trading sessions only four have been green and they have tended to be shallow and variable. So last night's 'best trading day' of the year is not unexpected considering the downtrend theme of the year so far and the fact US earnings season was actually well ahead of expectations. Remember Monday's trade was the worst start to a February for the S&P since 1933; the bull will find reasons to buy with the Dow off 6.09% year-to-date.

What was interesting overnight was the employer productivity data; depending on how you want to read into the numbers, there are positives from an economic point of view. Having seen productivity increase rapidly as wages were wrung out over the past year due to companies slimming down to cover economic risk and falling revenues, the results last night show quarter-on-quarter that company hiring is picking up, yet productivity has maintained. From a Fed perspective, wage growth and increased hiring is exactly what it wants to see (inflation and employment) and reiterates what some on the FOMC are forward calling.

As seen on Thursday, Philly Fed President Charles Plosser believes unemployment and inflation will accelerate over the next half and believes stimulus should be unwound even faster than its current path. Data like what was seen last night does give a glimpse to that reasoning.

So with the green on screen from Europe and the US following the green on screen from Asia, particularly the Australian market yesterday, is all forgotten?

Ahead of the Australian open

I think on a three-month view this is unlikely. China returns from Chinese Luna New Year holidays today and is likely to play catch up for the seven day holiday it has just been on. The holidays are also likely to feed into retrospective data over the coming months and will give the China bears even more fodder as data will come in under expectations due to the downing of tools. The March and April data last year was a trigger for a correction on the ASX, then the credit concerns took over to push further; I have a great sense of déjà vu here and expect a similar story to appear this time.

However, looking to today's trading session, local data will again be fundamental today, particularly the RBA policy statement. Having seen the Board move to dead centre by removing its easing bias call, more colour as to why this has happened will shine the spotlight on areas that are either performing or underperforming. It will also give insight into its opinion of what is a 'comfortable level' regarding the AUD and its opinion on non-mining that we believe is still struggling.

Currently we are calling the market up 38 points on the 10am bell (AEDT) to 5169, +0.74%; a healthy gain. However, this may reverse on the opening of Chinese markets. What is also driving the market is next week - the largest company data drop of earnings season with CBA, BHP and RIO releasing half- and full-year numbers. Expect positioning over the coming days leading into the results.

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