Global Markets Overview – August 12, 2014

Further signs of stabilisation

Russia has taken a further step back from the Ukrainian crisis, after having pulled back strike fighters from the border (however, Russian troops still remain).

This occurred as Ukrainian President Petro Poroshenko announced that there would be an international humanitarian mission for the city of Luhansk under the auspices of the Red Cross. The international Red Cross team will consist of the US, the EU and Russia.

These 'goodwill' gestures are positive signs and show that the tensions of the past month are subsiding and diplomacy can return to the table to hopefully see a final resolution to the conflict that began a year ago.

Iraq is also seeing the political stalemate that has crippled the country due to political infighting coming to a head, as the US talks a long-game with strategic strikes.

The political infighting which has allowed the Islamic State (IS) to swarm across the north of the country unchallenged looks likely to end, as there are growing signs that current Prime Minister Nouri al-Maliki will be replaced by Haidar al-Abadi who is currently the deputy speaker of the house. Iraq's President Fouad Masoum earlier asked Abadi to form government - a move that was quickly backed by the US, suggesting this is a very likely outcome and may finally see the Iraqi security forces engage IS with the help of further US air strikes.

The de-escalation in Ukraine and what looks like a change of direction in Iraq should take the heat out of the panicked selling of the past two weeks. The S&P after having reached a four-year high of 18.2 times earnings two weeks ago has now settled down at 17.5 times, yet the uptrend has not been broken. US futures still have not experienced a 5% or more pull-back since last November and have not experienced a 10% correction since 2011.

With the tensions slowing, the VIX index is also likely to take a breather after having jumped across the 200-day moving average last week. I see it stabilising around 14 points over the coming week before seeing upside as October's Fed meeting approaches and the likely end of the asset purchase program. The calm may present chance to reassess positions.

Ahead of the Australian open

News is light on the macro front today; Japan sees its domestic corporate goods index being released, which is unlikely to have a major bearing on the JPY or the Nikkei. Australia will be watching the NAB business confidence numbers considering the large increase in the unemployment rate last week, while also waiting on the housing price index after having seen a slowdown in pricing since the Federal budget.

We are currently calling the ASX 200 up 0.3% to 5471, which would mean it still hasn't recovered from the drop on Friday; however tomorrowsees the largest security on the market report, CBA, and Thursday sees the biggest yield trade of the past three years in Telstra also reporting full-year numbers. Positioning in either will boost the overall index considering their weighting.

Today see the likes of Bradkin, GPT Group and Domino's Pizza report a very interesting cross-section of the Australian business landscape with a mining service play, construction play and a staple; could they provide a good insight as to how FY14 has treated three different spaces?

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