Stockmarket faces heavy weather

Equity markets could be headed for a tough few months, as concerns resurface over the economic data from the US and China.

With the first half FY14 reporting season now behind us, we take a look at where the market is positioned and the outlook for the coming months.

Year-to-date, the S&P/ASX 200 Accumulation index (XJOAI) is up 1.8 per cent. Delving deeper, it’s actually been a reasonably volatile start to 2014 as the XJOAI fell 5.3 per cent in the first five weeks before recovering a staggering 8 per cent in roughly three weeks. 

When the market bottomed on February 5, the odds were in favour of a rally into and during reporting season as companies were expected to meet or exceed overly pessimistic expectations. Fast forward a month and now we’re at a point where the low-hanging fruit has largely been picked.

In fact, the headwinds are building and are beginning to point towards a tougher period for equity markets in the coming months. Below are a few of the developing headwinds:

1) Market going ex-dividend

Over the next few weeks, significant points will come out of the index as many companies go ex-dividend, including major dividend payers such as Rio Tinto, QBE and Brambles.

2) Chinese data is weakening

Concerns continue to hang over the Chinese economy as the government continues its plan to manoeuvre the economy away from exports and more towards domestic demand and service industries.

Highlighting this was the latest Manufacturing PMI data released over the last few days. It showed a continued deceleration in Chinese growth as the barometer fell to an eight-month low, barely holding above the critical 50 level that marks economic expansion.

3) US economic data has softened

In recent months we have seen a weakening of US economic data, which has mainly been attributed to the incredibly severe winter weather that has paralysed much of the central and eastern states.

Last week, fourth quarter GDP was revised down to an annual growth rate of 2.4%, indicating Americans weren’t quite as confident about making purchases during the festive season as previously thought. If this continues then it could open the way for the Federal Reserve board to slow their tapering efforts.

4) Political tensions in Eastern Europe

Adding another level of uncertainty to the outlook is the fast developing tensions between Russia and the Ukraine. Over the weekend the situation escalated rapidly as Russia captured the Black Sea peninsula of Crimea in what has been viewed as an incredible act of aggression. With the potential for all-out war looming large, markets will remain cautious and may even price in the worst case scenario.

5) Seasonal weakness

We’re entering a period of the year when historically the Australian market tends to trend sideways or underperform. Over the last 12 years the market has underperformed during the first quarter before rallying into a late April high, only for it to then rollover as the ‘sell in May and go away’ thematic plays out.

Due to the recent strength, we feel the market is more likely to drift through the coming months with a negative bias as it lacks any real near term catalyst to propel it higher.

Ben Potter is the Retail Editor at Baillieu Holst Ltd.

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