MARKETS SPECTATOR: Breaking out

The Australian market appears to have decoupled itself from overseas markets and, with interest rates going down, the stage is set for a period of outperformance.

It certainly looks like this market wants to go north. Leads from offshore weren’t inspiring at all yet participants are bidding this market higher, which is very encouraging indeed, especially ahead of the start to US third quarter earnings tonight.

Last week’s interest rate cut has certainly seen a shift in sentiment towards the domestic market. From last Monday’s close, the S&P/ASX 200 is now up 2.7 per cent while the broad-based S&P 500 is only 0.7 per cent higher. This, I believe, is a sign that the domestic market is starting to decouple itself from overseas bourses.

We’ve had a significant period of underperformance versus offshore markets due to numerous reasons (political uncertainty, high Australian dollar). Now it appears that we are beginning to see a period of outperformance. The driver behind this, I believe, is the realisation that financial conditions in Australia have started to ease.

In fact, according to Goldman Sachs last week’s rate cut has seen conditions ease to their most accommodative since June 2010. Further rate cuts in the coming months would see conditions ease to the most accommodative since September 2009.

I’ve mentioned this before but we also may be beginning to see the early signs of the FOMO, or 'fear of missing out' trade. So many participants have missed the recent performance and have been hellbent on buying the next pullback. However, it hasn’t come and instead the index has broken out to 14-month highs and looks set for further upside. Hence it looks like some players have taken their medicine and are simply buying at market.

In terms of the big movers, the energy sector is topping the leader board, buoyed by news that oil and gas giant Total has signed five licensing agreements with Oil Search to operate in PNG.

Elsewhere, the mining sector is putting in a very strong performance too on the back of a strong bounce in the Shanghai Composite. A 5.6 per cent gain in iron ore prices is also helping boost sentiment, especially among the pure play iron ore stocks.