Asian markets looked to be digesting their gains this week with fairly flat trade on Friday. The pullback seen in the US dollar in the wake of the Fed minutes does seem to reflect a lot of uncertainty around the pace of rate hikes by the Fed. It is this US-dollar weakness and ongoing swoon in commodity prices that provides a jarring counterpoint to the gains seen in Asian equities of late.
Many markets appear to be at an important juncture where they are set to break out dramatically to the upside or the downside. Given we did see such a dramatic equity selloff in Q3 and markets generally perform well in the final month of the year, further upside does seem likely in the near term. But the uncertainties over future Fed policy in the wake of a potential December rate hike, ongoing China slowdown concerns and the commodities rout do not bode well for Q1.
However, it is the copper price that provides the greatest source of dissonance for the performance of global equities. Copper is still trading at close to its lowest level since 2009. Why is this such a concern for global equities?
The four great bull markets of the 20th century were preceded by a turnaround in the copper price. In 1921, 1932, 1949 and 1982 after a dramatic selloff in equities, it was the steady increase in copper prices that portended the following multi-year bull markets.
Given that, it is difficult to be too optimistic about the trajectory of global equity markets until we see an end to the slide in commodities and copper in particular.
The Nikkei in particular does look to be coming under a bit of pressure as it approaches the 20,000 level. The Nikkei gave back about 0.4%. This was particularly driven by a pullback in Japanese financials after their Fed-minutes-driven rally yesterday. The Nikkei volatility index has been easing all week after spiking on Monday in the wake of the Paris attacks. It is currently sitting at 20.9, but a further fall to 20 will it back at its early August lows.
There is still some serious momentum in the Nikkei with 64% of stocks trading above their 200-day moving average, the highest level since 22 August. The 20,000 level is key; a close above that would be very bullish for the Nikkei, likely seeing it push up into the 20,500-20,900 level. If today’s pullback on the index proves to be short-lived, that is.
ASX
The ASX has managed to buck the general trend in Asian markets today by being able to hold up in positive territory. The solid buying seen in banking stocks is really driving the performance of the index today. A lot of sectors were nonetheless down on the day, with healthcare, utilities, telcos and energy all seeing noticeable declines. The steam did come out of the ASX towards the close, but the index finished up 0.26% at 5256.
Seeing such weakness over a broad range of sectors and yet still finding the index as a whole comfortably up really goes to show the market-cap power of the banks as they push the index higher when having a good day.
The materials sector has been very mixed today, with almost half the stocks up and the other down. Nonetheless, the sector has managed to stay in the green, no doubt helped significantly by a steady number investors believing BHP’s share price has bottomed. Nonetheless, other big names in the sector, RIO, FMG, S32 and BLS, were all down on the day. The conflicting influence of a weakening US dollar and continued falls in commodity prices are making for volatile trade as investors are uncertain about what it means for commodity stocks.