Global Markets Overview – July 8, 2014

The higher grind

It's been 109 trading days since the S&P futures has had a pull-back of 5% or more and on current trend, is it unlikely abate anytime soon.

There are now analyst estimates which suggest second quarter numbers from the US could collectively see double digit growth for the first time post the GFC.

This all feeds into the theories that the US markets are likely to grinder higher still. This is despite the fact that we are now starting to see more and more speculation about the future of the federal funds rate and the 'move higher'.

Bringing forward their expectations on the fed funds rate overnight was Goldman Sachs moving their expectations of the first move higher to the third quarter of 2015 from the first quarter of 2016. This is a substantial move forward in time. However, it is still 12 plus months away, and with the rate still sub -0.25% credit spending and corporate expansion can continue relatively unabated.

What is also interesting from the point of view of the fed funds rate is that inflation was, and is, a key part of the decision to introduce monetary accommodation along with employment. However unlike employment, which is now at pre-GFC levels, inflation is still lagging expectations, particularly wage inflation, and that could see the rate remaining rooted to the floor for 'a considerable amount of time'.

With all this in mind it is hard to see the market moving away from the trend in the near future. There is going to be plenty of contrarian views on the market over the coming months and I too think - come the final exit of the asset purchase program in October - that the US markets might finally see a pullback but on current trends. The cut of US data and the fact that momentum has yet to change on an interim trading thematic it's hard to make a strong case against a higher market.

From an Asian-centric perspective there are also sign that this region in on the improvement. Copper continues to rise as Chinese investors see positives translating from the targeted loosening of policy from the PBoC and the central government.

Japan is inching towards its goal of sustainable inflation, today we see its macro release for its current account surplus, most believe it will have increased further last month and a positive read this morning will only enforce that Abemonics and the current monetary setting from the BoJ are working although at slower pace than originally estimated.

Ahead of the Australian Open

Despite the rather strong moves in the Europe overnight and the red prints in the US, the Aussie futures and cash market remain relatively flat. I am currently calling the Australian market down, but only by six points to 5513 on the 10:00am (AEST) bell.

Iron ore was weaker, but only by a few cents, and yet we did see pressure in natural gas overnight and that may see the cyclical energy sector sliding on the open. With no real major data out till Thursday, the AUD is also unlikely to trade outside of its current trends.

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