S&P see-saw

Since June the S&P/ASX 200 Index has see-sawed. It has oscillated between perceptions that the market’s 10% fall from May 14 to June 13 represented a buying opportunity and other views urging caution. A slowing Chinese economy coupled with a rising interest rate environment, as the US Federal Reserve pares back its bond buying program that has underpinned record-low global rates, spells lower share prices.

The bear case is perhaps more compelling. The old adage, ‘don’t fight the Fed,’ still resonates with investors globally. Even if the Fed’s more bullish reading of the US economy is good news, rising rates have traditionally spelled doom for equity markets. Even Australian-based analysts are now turning their attention as to when the Reserve Bank may raise rates as opposed to when it may next cut them. Some, notably Citigroup’s Joshua Williamson, reckon the Reserve Bank will not cut the benchmark cash rate again this year. He says the central bank’s “jawboning,”of the Australian dollar downward may do the job of providing relief to beleaguered local industry rather than further rate reductions.

Moreover, it is clear earnings reports for the 2013 financial year are going to make glum reading. Companies in the mining services, construction and engineering sectors have in some cases given not one but two cuts to their 2013 earnings forecasts. Mining companies such as BHP Billiton and Rio Tinto prefer to speak of cost cutting rather than projected profits (see Robert Gottliebsen's Making BHP more like CBA). Even the banks, the darlings of the market, are engaged in further rounds of cost cutting. National Australia Bank wants to save an additional $110 million a year over the next five years, The Australian reports.  Business talks not of expansion but of battening down the hatches.

Between June 13 and June 19 the S&P/ASX200 Index climbed 3.5% before falling 4.2% by June 25. The index then rose 3.3% between June 25 and June 27 before falling 2.1% by July 1. Yesterday’s 2.6% gain in thin trade enhances the perception investors have neither the confidence or conviction to make long-term bets. Everyone is trying to get ahead of the Fed. That is no easy task and means trading will likely to be volatile in the months ahead.