by Raymond Chan

Over the week, CRB Index +2.4%, FTSE +1.3%, HK +1.3%, TSE +1%, ASX 200 -0.1%, S&P500 -0.2%

Liquidity in our market has continued to rise over January as newsflow increased and market participants eased into the new year. Unfortunately trading screens were mostly red early in the week with mixed offshore leads leaving Australian equities directionless. Positive US corporate earnings and news that the US House of Representatives overwhelmingly approved a US$1.1 trillion spending bill for fiscal year 2014, drove global equity markets higher as the ASX 200 recouped earlier losses.

The agreement reached by the House of Representatives caps months of negotiations and signals a truce following three years of fiscal battles plaguing Washington. The measure, which funds federal government under the budget framework, passed 359-67 after the bill was hammered out by Democrats and Republicans last month. The result is a strong show of bipartisanship and will now head to the Senate, where it is expected to pass before being signed into law by President Barack Obama.

Here’s our outlook for 2014:

Global Economic Outlook

  • Pace of US economic growth seems to have taken necessary leg-up Fed has been looking for
  • Showed resilient enough to cope with contraction due to budget sequestration
  • Markets are adjusting to expectations tapering will begin 1Q 14 (maybe small adjustment Dec)
  • Market pricing in US interest rate increases mid-15
  • Yield curve will continue to steepen but expect bond rout to be relatively orderly
  • Rest of world (Europe, Japan) improving but still weak – needs a stronger US economy and $US

Australian Economic and Sharemarket Outlook

  • Terms of trade adjustment expected to take longer than RBA – several more years.
  • Commodity price forecasts may mean some new mining capex.
  • Expect strong contributions from housing and consumer spending in 2014
  • Unemployment and falling participation and high currency two blemishes on growth outlook
  • Nevertheless, GDP growth expected to move back to trend (3%) in 2014
  • Expect ASX200 to be 5,800 points by end 2014 based on consensus forecast – 9% upside
  • Earnings growth expectation 8% in FY14 – 10% in FY15
  • Materials leading sector for earnings growth – 16% in FY14 – need currency depreciation to achieve this
  • Industrials and Energy would also be performers if this is the case
  • So currency key upside factor, weaker US key downside risk

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Raymond Chan is the Managing Partner and Authorised Representative of Morgans - 259387
Morgans Financial Limited (ABN 49 010 669 726 AFSL 235410) A Participant of ASX Group
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