Santa claus arrived and left early for equity investors in December, equity & oil markets lower, ASX futures 63 points lower

Australian equity investors enjoyed a 230 point rally from the ASX's early-December lows to its December high one week later, but unfortunately this has now been entirely reversed, with ASX futures back right where they bottomed out on 2 December, at 5179. For a couple of weeks now the world has been divided between the net benefit that low oil prices will have on global economic growth. Some say it is akin to the lowering of taxes on consumers in a world addicted to oil, some say the world is not only losing its addiction to oil, but any disposable income freed up from lower energy prices won't be ploughed back into economies because sentiment is too low. And with so many developed countries already experiencing deflation (Belgium, Greece, Israel, Poland, Spain, Sweden, Switzerland and now France's core inflation rate is negative), where is the rush to spend your savings if one of your better investments might be to hold cash for one year and get a positive real return?

One thought that should comfort equity investors is that the macroeconomic and geopolitical uncertainty pertaining to lower oil prices is primarily affecting those who make a margin from either discovering or producing oil, along with other sector-specific anomalies like rail becoming less competitive over trucking. Unlike a global credit crunch or a runaway inflation scenario where interest rates rise and destroy demand, the uncertainty that faces investors from significant drops in the price of crude oil does not impede the ability for the majority of the micro-economy (corporations) to get on with business as usual and make money. This is certainly illustrated among airlines, which are managing to keep their revenues steady while their energy costs fall. In today's third chart I have illustrated the moves in a handful of airlines, which have responded very well to falling oil prices. The orange line is WTI crude oil, with the positive movements coming from China Eastern Airlines (black), China Southern Airlines (light blue), Japan Airlines (light grey), American Airlines (dark blue) and Qantas (green). The effect on input prices for the airlines is obvious and can be easily used to forecast improvements in earnings, which is why the response has been so immediate. The big question for these and others who produce value by using a significant energy component is, how long will these prices stay low?

While the US is doing well, Europe is in a horrible mess, Japan is still experimenting with economics, and China is trying to get its economy to slowly adjust to more sustainable rates of growth. Economic fire power in the form of stimulus has already been used liberally in these economies, so with respect to oil and other commodity markets that are on the wrong side of the supply/demand curve, investors should prepare for the absence of a snap back to medium-term mean averages and focus on industries that will either be unaffected or those that will benefit such as transport (airlines, express delivery companies, shipping companies etc.), car manufacturers (and manufacturers in general) and agricultural companies.

Lastly I'll cover the weekend's Japanese elections. This is being reported as a big win for Shinzo Abe, but the reality is that it has amounted to political theatrics, given that Abe's party majority will come out of the election looking the same as it went in. The USDJPY currency pair (today's second chart) is little changed this morning for good reason - the country expected Abe to postpone the contentious consumption tax hike there with or without an election, and therefore it is business as usual for Abe's economic plan, possibly with a touch higher conviction given he didn't lose his overwhelming majority.

Today’s charts are taken from the Rivkin Trader platform. 30,000 global instruments available to trade including FX, commodities, index, ETFs and international shares. Trade Australian share CFDs from just $8 or 0.10%. Click here or phone 1300 748 546 to get your free $100,000 demo account.

Upcoming economic announcements: Tankan Manufacturers Survey (Japan) 10:50am, US November Industrial and Manufacturing production at 1:15am, all Sydney time.


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