It's getting hard to believe in Santa

Friday’s sharp fall in US markets, leaves the strong gains earlier in the week looking like just another episode in the volatile range trading that has characterised markets over recent weeks. Hopes that a year-end rally was getting under way have been dashed. Even if it does materialise, any year-end rally may be just more range trading, rather than the beginning of a concerted push above resistance.

Friday’s sell-off underscores the difficulty the US stock market currently has in playing its traditional role as leader of world market rallies. US valuations are full already. This makes the US market vulnerable to risk off moves. Gains from current levels are also likely to be more a case of grinding higher in line with earnings growth as opposed to trending strongly higher on valuation expansion.

European markets are likely to be focussed on the results of the Spanish election. Early indications that Spain will be governed by an unwieldy coalition will increase the political risk to markets from this pivotal European economy.

The local market is in for a nervous start to the week. However, indications are that the ASX200 index will remain inside Thursday’s range. This will continue Friday’s pattern of consolidation as opposed to indicating a major reversal at this stage.

The weekend news for commodities was mixed. Oil prices were weaker, however iron ore has remained firm in recent days and copper jumped sharply on the possibility that China will increase inventory levels.

News that all 163 nations in the WTO have agreed to end agricultural subsidies may be supportive for Australian agricultural exporters in the longer term. However, the devil may be in the detail of how some nations get around this deal. Even so, the WTO agreement is a sign that attitudes toward liberalising agricultural trade are headed in the right direction and follows positive news for the sector from recent free trade agreements.