Global Markets Overview –3/5/2013

No major data was released in the US overnight, with most investors were watching Vice Chairman Yellen's speech to the National Association for Business Economics (NABE). She reiterated Chairman Bernanke's view that a hasty end to easing could backfire. This added additional weight to the earlier comments and alleviated 'liquidly dependant' fears sparked on February 21. Professor Yellen's speech helped all three major US indices finish in the green as they did on Friday after Bernanke's speech. Heading into the close, the S&P 500 was up five points to 1523 as it heads back towards the 52-week high of 1531.

Yesterday was a very interesting trading day on the ASX (ASX.AX), Hang Seng (HK.HSI) and Shanghai Composite (SHCOMP.IND), with 'property fears' lighting up the screens. The Shanghai Composite dropped 3.7% yesterday (the property sector fell 9.2%), its largest drop in 19 months and dragged the HK and the ASX down with it on fears Beijing is about to put the brakes on the property market. Late Friday night China increased the down payments on the second homes and increased capital gains tax rates to 20%. The fear wasn't helped by a report form 60 Minutes in the US producing a 'fair and balanced' assessment of the state of China's property space. Fear begets fear and all three markets fell on the concerns.

There is no doubting the property boom in China; it is simply awe-inspiring. However, the whole property bubble speculation is not a new concept - it has been around for years now. The one thing most analysts never talk about is that one 1 in five people in the world are from China, and it is believed that there are now over 100,000,000 millionaires in China, and this number is increasing every year. That amount of money has to go somewhere; property is just one space the Chinese have in their back pocket. If property slows, export and the domestic consumption is the next stop. China is already starting to move into advanced manufacturing (i.e. electronics and car manufacturing) and is already pushing into global markets.

The other advantage it has is its own domestic population; if it can increase consumption, its economy is assured. The counter agreements to this is that most of the population lives below the poverty line, consumption has a finite limit, people need income to consume etc. However, 100,000,000 million people is a quarter of the US population, the middle class is accelerating at an almost unquantifiable rate possible, and consumption is there for the taking if China chooses.

I reiterated yesterday's call with Beijing essentially in lock-down with the annual parliamentary session (which will be heightened by the once-in-a-decade leadership change). Today the National People's Congress will outline the nation's economic and social objectives for the year, as well as the political restructure. Watch the pure plays and energy stocks this week as Chinese economic policy filters out into the newswires.

Today the RBA will be hitting the newswires. All eyes will be on the press release after the cash rate is announced. The swaps market is pricing in an 83% chance there will be no change. After last week's capex announcement (which UBS has labelled the most important financial release this year) that showed non-mining is starting to pick up the slack (an indicator Mr Stevens has been watching very carefully), I would concur that a rate cut today is slim at best. I think the press release will show that the board is actually pretty happy with the state of affairs and will leave rates on hold now until after election. The fact AUD/USD has now slid over four cents in the past two months indicates rates may be on hold for even longer. Retail sales figures and the current account are also out today and are skewed to upside risk.

There is a double-edged effect here; first a lower Aussie dollar will benefit risk assets that have most of their earnings denoted in US dollars, then exports prices will appear cheaper improving bottom lines and this should see materials and energy stocks legging higher.

The counter to this is yield-play stocks have dominated the market over the last 9 months as investors look to 6% to 9% net yield on the belief rates are going to fall further (some analysts forecast rates as low as 2%). If rates remain on hold, this could take some of the shine off the yield-play as investors assess the volatility risk in stocks versus the current 3% differential. However, Bloomberg forecasts 19% of companies will report dividend growth over the coming year compared to 14% last year. The main drivers in this 19% are expected to be financials and telcos; the yield-play looks to be assured for now.

Moving to the open, we are calling the ASX 200 up 43 points to 5053 (+0.86%) as investors lap up the dips created yesterday and jump on 'cheap' entry points. Watch the yield-plays today, particularly the banks as CBA and WBC chase all-time highs after being sold off yesterday. Risk is back on today and after going ex-dividend yesterday and being sold off further on commodities and China concerns, BHP's ADR is suggesting BHP will add 55 cents to $36.12 (1.55%) today, even with commodities sliding overnight. It should drag the materials space with it.

As I stated yesterday, the pullbacks we are seeing when the market gets to 5075 to 5100 are healthy and required for longer-term strength. It is very pleasing to see how strong the buying strength is when dips occur. The fear of 'missing out' is getting stronger.

IG Markets provides round-the-clock CFD trading on currencies, indices and commodities. The levels quoted in this email are the latest tradeable price for each market. The net change for each market is referenced from the corresponding tradeable level at yesterday's close of the ASX. These levels are specifically tailored for the Australian trader and take into account the 24hr nature of global markets.

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