Global Markets Overview – January 7, 2015

Oil continues to cause carnage

The US market logged its fifth consecutive day of losses overnight, something it didn't do once in 2014. The last time it logged a five-day losing streak was December 2013.

Bonds are rallying and the yen is seeing strength against most majors bar the USD. This all points to mild panic and a flight to safety - something global markets have become accustomed to over the past seven years.

Market sentiment will likely be affected by these factors over the next four weeks:

• The oil sell-off will continue. Over US$1 trillion in value has been lost in US equity value over the past month since the global sell-off began and this looks set to be tested further in the coming weeks.
• Asian markets saw their biggest daily decline since March 2014 yesterday as Tokyo, Sydney and Hong Kong look unable to stem the fallout from Europe and the US. With no major economic news due for a week in this region, Asia will blindly follow the US's lead.
• West Texas Intermediate (WTI) fell to another five-and-a-half-year low, as did Brent Crude. The bottom has yet to register and, until oil finds bottoms, the markets will remain in a downward trajectory.
• USD strength is now becoming a concern; corporate America derives approximately 53% of all revenues from oversea markets. The rapid appreciation against the EUR and JPY has fundamental analysts concerned earnings are likely to be impacted. Fourth-quarter earnings unofficially start next Monday with Alcoa, hitting full swing the Monday after. If US corporates start to see lower growth, the effects of monetary policy over the past five years may unwind as the US economy could see employment slowing, inflation stagnating and economic growth evaporating.
• Interestingly, iron ore may be about to see some price appreciation. Chinese inventories hit an 11-month low on data released from Shanghai, Steelhome shows. Steel mills have begun to restock on the lower pricing, meaning stock piles at Chinese ports have fallen steadily for the past six weeks. At US$71.49 a tonne, it still has plenty of room to move and restocking may bump the price up.
• China is now a few weeks away from releasing its fourth-quarter GDP figures. Estimates are forecasting year-on-year growth of 7.2%. The central government has forecast that 2015 will repeat 2014's growth profile. I see the acceleration of the 300 infrastructure projects announced a few weeks ago, worth CNY7 trillion, as a way of shoring up the GDP forecast. It will maintain employment and wealth, while also increasing Chinese demand and growth . It will also see industrial metal demand increase.

Ahead of the Australian open

With the US markets again under pressure, the lead for Asia looks bleak. We are calling the ASX down 25 points to 5339, which would see it below yesterday's intraday low. The energy stocks will again see large falls and we would suggest giving the space a wide birth until some form of stability is reached. BHP's ADR is flat at $28.15, as iron ore rose slightly overnight, which was then offset by oil.

The low volumes will remain and the concentration of trading is likely to remain in the material and energy space. Trying to catch these moves is a dangerous strategy and, considering the events that are due over the coming few weeks, the erratic nature of low-volume trading can catch investors out.

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