Global Markets Overview – December 15, 2014

Shinzo Abe secures resounding victory

Global equities extended their slide on Friday, with investors continuing to focus on the slump in oil prices. Oil remained at levels not seen since mid-2009 with WTI remaining below $60 per barrel. Apart from China, which benefited from some surprisingly solid data, the rest of the globe struggled on Friday. Retail sales and fixed asset investment were mildly better than expected, but industrial production fell short presumably due to factory closures ahead of the APEC summit.

M2 money supply data was also released with the number remaining below 13%. This is the PBoC's key threshold and as long as it remains below the 13% target, the PBoC has room to ease. In terms of easing, analysts continue to feel an RRR cut will be the most likely with a chance of further rate cuts next year. Given these expectations, I wouldn't be surprised to see Chinese equities continue to outperform.

Yen weakness likely to resume

The big news from the weekend was that Japan Prime Minister Shinzo Abe secured a two thirds majority in the election. Mr Abe reportedly won around 325 of 475 seats which effectively allows him to press on with his economic policies. This more than two thirds majority gives Mr Abe the power to pass legislation through both houses. Fresh blood in key positions will be crucial if Mr Abe is to push through with reforms and fresh ideas.

Mr Abe has already been quite vocal and predictably felt the victory was an endorsement of Abenomics. There are some concerns though about the low voter turnout (52%), although some blamed it on adverse weather conditions.

On the economic front we receive the Tankan index today which is always key, but I'm sure most of the commentary will be around the election victory and what it means going forward. This week we also have the BoJ meeting which concludes on Friday and action around this meeting will not be too big a surprise given the central bank's indirect role in Abenomics.

Given the pullback we saw in USD/JPY and the Nikkei last week, I feel there is room for a recovery this week. There hasn't been much of a move in the yen as yet, but given the massive boost from an Abenomics victory, I feel we can expect more of the same movement we've seen since Mr Abe initially came to power.

Economic update to show fiscal strain

Ahead of the local market open, we are calling the ASX 200 down 1.3% at 5152. In October we traded as low as 5122 and we are likely to test that level in the near term. More pain for the energy and materials sectors is likely given the turmoil in commodities.

Gold, oil and iron ore were all weaker and this will put the ASX 200 on the back foot. Perhaps the region might get a kicker from Japan today, but still we'll have to come from a long way down.

On the economic front, today we get the mid-year economic and fiscal outlook release where surplus forecasts are likely to be pushed back further. Strains from this review, which is expected to show a massive drop off in revenue, will likely weigh on the AUD today. An iron ore price of as low at $60 per tonne is being forecast. AUD/USD could trade below $0.8200 in the near term.

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