Global Markets Overview – July 23, 2014

Bottom-up growth

Global macro concerns may have outweighed trading yesterday due to light reporting; however out of the 36 individual companies that reported to the market, 79% beat expectations, meaning bottom-up actuals outpaced the global gloom being generated by geopolitics.

The S&P made a new intraday record high on the back of the better earnings, while the US consumer price index held the line meaning trade was unhindered by data. However, core CPI was lower than expected, meaning the FOMC will continue to point to inflation as a reason to retain the current monetary setting for the Fed funds rate.

What will be even more important to this call is wage inflation. In the coming weeks we will see wage inflation data from three different sources: ADP non-farm payroll numbers will have an inflation index built into it; the employment cost index with its a key measure of wage inflation; and then the official non-farm payrolls which also produces a wage inflation gauge.

Chairperson Janet Yellen has increasingly pointed out that there is more to be done with monetary policy to rectify the wage growth concerns. Although the FOMC's target of 6.5% unemployment has been well and truly reached, wages are dead flat and if it was to contract it would spook confidence, meaning the FOMC is likely to hold the line with the Fed funds rate and an early rise seems unlikely.

This is why I see the current trend in the market holding true; the US markets are moving higher and are likely to continue this trend in the interim. There are reasons to point to possible pull-backs, but again the S&P futures are now up to 123 trading days without a 5% or more pull-back, which suggests come September the market is likely to be higher still. Come October, when the Fed fully withdraws the asset purchase programme, then we might see this trend slowing and/or reversing. Until this reverses, I am following the trend.

Ahead of the Australian open

The AUD will again take centre stage in Asian currency trading, with Australian CPI data due at 11.30am AEST. Year-on-year numbers are estimated to hit 3.0%, which would be right on the edge of the RBA's comfort range of 2% to 3%.

However, the figures to concentrate on from an RBA perspective are the trimmed mean figures, with core inflation, which is estimated to hit 2.7%. Do not be surprised to see the AUD possibly overreaching to the CPI read on theories of rate hikes; this is likely to settle if the trimmed mean comes in-line with expectations, meaning inflation remains contained.

We are currently calling the ASX 200 up 16 points to 5556; today could be the decisive break out of the heavily-defended resistance level of 5540 to 5545. A close above this level is likely to see the market returning to upside risk in the interim as we approach FY14 earnings season. The banks have seen lax trading

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