Red, white & blue

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FAT PROPHETS: It was a tough week for markets that ended on a tragic note with the terrorist attacks in Paris leaving over 130 dead. Saturday was a sad day for France and the rest of the world. There has been a breakout of solidarity however with Australia, the UK and the US, and many other countries around the world showing their support for France. In Sydney, the opera house was turned red, white & blue out of sympathy for the French. I really do hope that Saturday proves to be a turning point in the war on terrorism and get the feeling that the political leaders, including Russia’s Putin, have all just had enough.The S&P 500 fell back by 3.5% last week with this the steepest decline since late August.  US dollar strength and the prospects of a rate rise by the Fed next month placed commodities and equity markets under pressure. The 2100/50 level on the S&P500 was always going to be significant in terms of overhead resistance. Last week’s selloff has therefore been a reactionary corrective retracement, but the S&P500 now needs to hold the 2000 support level – certainly a move further lower to 1890 would jeopardize our bull case scenario for the next four months.

I do not envision the current pressure enveloping the markets to endure for too much longer however. As we move towards the key December 15/16 Federal Reserve meeting, I think the rhetoric around a tightening of monetary conditions is going to soften and be “couched” in such a way that the markets will be placated. The Federal Reserve will not, and cannot, lift interest rates quickly if they want to avoid triggering to much US dollar strength.

With commodity markets under pressure, and the inflation outlook benign, to do otherwise could risk the global economic and domestic recovery. So the Fed will seek to avoid this, and I remain of the view that any interest rate adjustment will be more ‘cosmetic’ than anything else.

So stock markets could well have a very strong rally running into the end of the year which could then endure well into the first quarter of 2016. The weekend’s terrorist attacks will unsettle the stock markets today however and we can expect further selling pressure, particularly in Europe.

Headline US retail sales were weak in October with an increase of just 0.1% against September against expectations for a 0.3% gain.  The ‘control group’ measure saw a 0.2% increase versus market expectations for a 0.4% gain. The control group measure strips out petrol, food and building related purchases, to focus on underlying prices.  It was moderately higher than the headline rate on account of recent falls in petrol and food prices.

The University of Michigan index of consumer sentiment rose to 93.1 in November from 90 in August.  The reading was ahead of expectations for an improvement to 91.5 but this did not boost retail sales, and this is essential for GDP growth. The Fed tends to procrastinate over every bit of weak and positive data, which in turn, has confused the markets, and so the latest retail sales numbers will have some influence over next month’s meeting.

Growth within the Eurozone came in at 0.3% during the third quarter, hardly enough to get anyone excited, however at least the overall economy is now growing after nearly 8 years since the GFC. Just on a year ago the Eurozone grew 1.6% versus 1.5% last quarter. The weaker Q3 performance came in after Finland incurred a 0.6% contraction along with Greece and Estonia shrinking by 0.5%. Spain was one of the stronger countries with a 0.8% expansion while France and Germany saw 0.3% growth.

Oil prices slipped below US$45 for first time in three months on Friday. Brent crude closed at US$44.5 while WTI crude fell to US$40.73.  The IEA reported last week that global oil stockpiles have hit a record 3 billion barrels. This is due to record supplies from Iraq, Russia and Saudi Arabia even as prices remain depressed.  The oversupply combined with the record crude oil inventories means that any supply disruption is unlikely to lead to a prolonged oil price rally near term.

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