Tuesday, October 7, 2014

Market Analysis -- 7th Oct 14

Global markets ended 3Q on a weak note given by the couple of global events namely geopolitical issue in Ukraine with Russia, ISIS in Syria and the latest Hong Kong pro-democracy protest.  On the economic front the weak economic data from China, Japan and Europe all weighed on investors.  While US is showing strength in its economy recovery, that was overshadowed by the fact that US Fed will withdraw its QE3 this month and investors were all trying to guess when rate hike will be.  The weak market performance in 3Q also partly contributed by the fact that fund managers decided to sell off part of their portfolio to book a gain for their year end portfolio performance.

There should be no surprise this month that after the US Fed FOMC meeting it will withdraw all its QE3 but the one investors looking at is any cue from US Fed when will be the first interest rate hike.  It should be in 2015 with most anticipating in the middle of the year.  US Fed has a target of 1.13% at the end of 2015 and if each increase is of 0.25%, that will take 4.52 times to hit that target.  In another word, the probability of a 0.25% hike in each quarter is there.  Given that fact that US does not have any inflation threat at the moment, a sudden and sharp hike is never feasible and hence, marginal rise of 0.25% at a slow pace of a quarter each will be very much reasonable.  Therefore, the first rate hike could be as soon as in 1Q of 2015.  Global markets getting nervous when come to the topic of interest rate hike is not when the first rate hike will be but rather there is lack of analysts providing detail analysis of impact of interest rate hike to corporates in term of revenue and profit.  Without those, investors are missing that mental preparation of what should be expected and wondering are the current stock prices being overvalued or still undervalued.  Instead, analysts are jumping into the queue with investors trying to second guess when the first rate hike will be.  That does nothing but add on more jitters and nervousness to the markets only.

China recent economic data has been sluggish but yet to the level of pressing the red button.  This is mainly because of the impact of the economy reform and the wearing off effect of the mini-stimulus.  While most investors are looking forwards to China for further stimulus to boost its economy, Chinese Government on the other hand believed everything are under control and in no need to rush out stimulus.  Japan's recent economic data also showing weakness, the wear off effect of the so-called Abenomic and the sales tax hike.  The targeted inflation still fall short of the 2% level which BOJ has been looking for.  As such, can expect BOJ to continue to maintain loose monetary policies for the time being.  What investors looking at is what's the next step from its PM Shinzo Abe.  Europe is having a big headache at the moment as the threat of deflation has not gone away even after ECB's stimulus in the past months.  The euro zone growth is not picking up either and that prompted ECB to unveil the latest stimulus plan of ABS purchase.  Will that latest effort work ? your guess is mine guess but one thing for sure should it still fail to counter the deflation threat, one can expect a US QE3 style of stimulus from ECB next.  That perhaps will cheer investors and global stock markets.

On the geopolitical events, Ukraine and Russia has agreed to a ceasefire pact and now each trying to mend their respective economy impact now.  For the time being, that issue seem not an issue any more.  The ISIS in Syria is the current ongoing issue with US led group of nations have begun air strikes.  How that can eventually affect global economy is still unclear.  The latest geopolitical event is none other than the Hong Kong pro-democracy protest.  That a week long protest will definitely in one way or another hurt Hong Kong economy.  With Hong kong being one of the key financial hub in Asia, it is impossible to rule out any impact at all.  Latest news was Hong Kong leader decided to hold talks with protest leaders trying to resolve the situation.  While it is glad that the protest has not turned out into any catastrophic violence, the chance of the latest talks to resolve the whole situation is not high either as long as China does not give in to what the protesters wanted.  What to hope for will be China, Hong Kong and the protesters to find of a way so that all parties are in a win-win situation.

4Q 2014 should be more volatile for global stock markets especially with the topic surrounding interest rate hike.  For those funds that sold off in 3Q to book a profit for their annual portfolio should be monitoring the coming earning season.  Should the earning season providing some upside surprises, those funds might just have to buy back into the markets again if not can expect their annual portfolio to be again under-performing the benchmark.  For those funds that still holding and if the coming earning season turns out to be uninteresting or biased towards the downside, can expect them to start selling too.  Another scenario is market will continue to stay range bound for the rest of the year as investors continue to stay sideline to wait for clearer picture and confirmation of interest rate hike.  Regardless being a trader or investors with short, mid or long time frame, one should keep all options open and add accordingly to your objective.

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