It’s good to be back, especially as 2018 seems to be off to a very promising start! With global economic data still supportive and prospects for the impending Q4 US earnings reporting season upbeat, stocks have had little reason not to continue their rally in the year so far. After a 19% rally in 2017 (not including dividends), America’s S&P 500 is already up 5.1% for 2018 to date – and is pushing onto new highs. Australia’s S&P/ASX 200 rose 7.0% in 2017 but has peeled back 1% so far this year as the Index fights valiantly to hold the 6,000 level – and remains well shy of its pre-crisis peak of 6,748. Helping equities last year were relatively benign US monetary conditions, despite Fed tightening, as reflected in broadly steady US long-term bond yields and a weaker $US.
Of course, in that light, one potential new dark cloud on the horizon is the recent lift in bond yields. Importantly, US 10-year government bond yields have recently broken resistance at 2.6% (which is now the new support), with the next key resistance level 3%. The recent US consumer price index report was a little higher than expected, and continued relatively benign US wage and price inflation (which is my base case view) remains critical to the equities outlook this year. Perhaps surprisingly, the $US has remained weak and recently broke a key support level meaning next support is all the way back at its lows of mid-2014. As was the case last year, $US softness appears to reflect the market anticipating catch-up monetary tightening announcements in the laggard regions of Europe and Japan (and Australia) which I still feel will not be as forthcoming as markets are hoping.
A key feature of the past week was early progress in the Q4 US earnings reporting season. One upshot has been a (relatively) sharp one-off downgrade to Q4 expected earnings due to initial impact of America’s tax cut package – as lower tax rates mean the present value of future tax credits (capitalised as an asset on some corporate balance sheets) need to be revised down. One a more positive note, Apple announced it was now likely to repatriate billions in cash sitting offshore to help fund new investment (and most likely further share buy backs). This affirms my view that the US tax cut package is particularly favourable to the tech (and health care) dominated Nasdaq-100 ETF (NDQ), given it contains many US companies with large offshore earnings exposure.
Another talking point – though unlikely to seriously rile markets – is the looming threat of a US government shutdown. In Australia, economic data has remained upbeat with solid further employment growth and a (one-off) surge in November retail spending due to the new iPhone. That said, I still doubt the Reserve Bank is likely to switch to a tightening bias in its upcoming Monetary Policy Statement in early February (given weak wages growth, a softening in the Sydney property market and a fragile consumer outlook).
US government shutdown threats and further progress in the US earnings season are likely to remain key highlights in the week ahead. As only part (non-essential services) of the US government effectively shutdown in a shutdown, and a compromise deal seems likely eventually – markets are likely to take Washington’s theatrics in its stride.
There’s no key data in Australia this week, though the upcoming Q4 consumer price index report looms large on January 31.