The Australia Market ASX 200 has tracked the S&P 500 closely so far this year but in the last few days, the Australia large cap index increased the spread to 2% year to date.
The surge can be attributed to:
1. The conclusion of negotiations over the Australia – Japan Free Trade agreement
The agreement a decade and half in the making is certainly a positive for the economy in the medium term will be reinforced with anticipated closure of the South Korea agreement shortly.
2. Mergers plays in the retail sector as seen by the board of directors of David Jones (US equivalent of Saks 5th avenue) acceptance of a takeover offer from Woolworth of South Africa.
The ASX 200 significantly under performed the S&P 500 in 2013. Is a catch up in the works for ASX 200 under performance last year or this just being a temporary divergence? We are leaning towards the later seeing resources will continue to under perform given the risks from China. Consumer sentiment and retail sales show signs of strength however buoyed by the Australia property market, the sustainability of this sector is to be questioned. Throughout the year we have seen gaps appearing from the 2 indexes which were closed over 2 week lengths.
Risk sentiment out of the US are still weak. The melt down in techs and biotech are seeing temporary relief from large year to date losses. We expect the rotation out of momentum plays will continue, a dead cat bounce is a dead cat bounce which ever way you play it.
Europe will be pressured with tensions in the Ukrains. We do not anticipate an existential risks to the Eurozone in the near future (ala 2010) but the decline of the Irish and Italian 10 year yield on par with US treasuries looks stretched.
Australia Dollar Performance
We anticipate a positive run for the USD in the medium run which has weakened against all majors so far this year. The Australia dollar since March 2014 has decline $1.06 to mid $0.93 per US dollar. It has been rally from the low $0.90 just over couple moth ago and year to date up 4% against the USD.
It is quite surprising and we feel market is overlooking potential headwinds in the air either from continual Chinese economic weakness ( the downgrade of 2014/2015 growth with consensus decrease to 7.5% – the government target has become a ceiling rather than a floor. FT reports China real estate sales has declined 30% plus year on year) or broader macro risk i.e further escalation in Ukraine.