Expectations of an interest rate rise in the US continue to dominate markets.  The latest minutes from the US Federal Reserve indicated a divide over whether to take the plunge in June or September.
This means every bit of data coming out of the States will be closely scrutinised as people try to guess when the Fed will be prompted to act.  Markets also have dismissed the recently disappointing US employment report as a one off and not a trend.
Earnings season also begins this week in the US.  The expectation is sitting around -5% earnings growth. A lot of this is being driven by low oil prices as oil companies make up a considerable portion of the S&P500.
Helping support the market is a spate of M&A corporate activity, which is possibly being driven by improved corporate sentiment or the pending change in the interest rate environment.
Interestingly, the media seems to have missed the fact that US long bonds are failing to attract investors – even though rates are at 1.95% compared to say Germany’s 10-year rates at 0.16%. It’s strange because offshore investors would benefit from the higher rates; and also the appreciating currency. It suggests the US bond market is predicting a rate rise and considers the economy to be healthier than many commentators.
Much of the exciting action in markets is happening outside the US; including in Shanghai where the market is up a staggering 91% over the past 12 months. Hong Kong broke through a technical barrier and rose more than 7% last week, whilst Japan’s N225 briefly broke through 20,000. Europe is also making new highs.
There are three main drivers to these markets; 1) lower valuations; 2) walls of money are moving in; and 3) the higher USD is increasing the earnings potential of many companies that are export orientated.
Here in Australia, recent data on housing; credit growth and retail sales points to an economy that is accelerating.
In particular, consumption growth has started the year on a strong note.  Consumption growth is being driven by lower petrol prices and increasing housing prices.  Whilst lower petrol prices are a one-off and hence won’t sustain growth for a long period, rising house prices and the wealth affect can.
Given that consumption accounts for at least 56% of GDP, strong growth will go a long way to offsetting the fall in mining investment.