US Fed focus reversing Santa rally, Hockey's iron ore forecast looking good, ASX futures down 73 points

European and US investors put the boot into an already-rough December on Friday night. While, statistically, it is probable to have relatively strong month-end returns on the ASX 200 at this time of year, that won't be the case for December 2015. Today's first chart illustrates that (ASX 200 & S&P 500 index CFDs in black and orange), and it also illustrates the disparity between European equity performance (Germany's DAX in blue), with investors there getting a cold shower as the notion of perpetually-loosening European money supply was quashed earlier in the month. The second chart shows the same three securities, with 2015 year-to-date returns and the black ASX 200 line here illustrates the pressure that Australian finance and resource stocks have faced, which together make up 60% of the ASX 200. So I don't think Australian investors should feel hard done by, rather they should stop following the ASX 200 - I know you're all going to get bored of me banging on about this, but blaming what this index does for your portfolio returns is not constructive. 

Excluding franking credits, the Rivkin Local Model Portfolio has had a 12-month return of -1.71% - the inclusion of franking would bring that to about square. Don't get me wrong, not a great year, but certainly not a year that mirrors the -8.40% returns we're seeing for ASX 200 after Friday's sell-off. So my advice is to make sure you visit and get familiar with the Rivkin Local Model Portfolio and its allocation of risk to different securities. This is the portfolio that Shannon Rivkin and I focus on with the rest of the team, and we align it with the management of our own money, so you won't find a better example of the investment decision we make in this office every day.

Given his fall from grace--not that he'll struggle with his parliamentary pension and US Ambassador package--I thought I'd reference Joe Hockey's US$35 per tonne iron ore call that he made at the release of the May budget this year. The most severe falls in the iron ore price as it relates to government tax revenues was in the year leading up to the last budget, as iron ore was over US$100 per tonne when the 2014 Federal Budget was released, and had fallen to as low as US$46 when the 2015 Federal Budget was being finalised. Forecast tax revenue was revised down by around A$20 billion after the FY2014-2015 fall, and the fall between then and now has been around 15% versus the 50% plus fall between the 2014 & 2015 Budgets. Of course tax revenues shouldn't correlate too strongly with the iron ore price itself, rather it should correlate with mining companies' ability to profit and thus pay tax on those earnings, but production costs have fallen significantly on the back of scale from increased supply and lower energy prices. For example, at the beginning of the 2014 financial year, Fortescue Metals Group's (FMG) all in cost per wet metric tonne was US$46, and that should be about US$10 lower now.

I raise all of this because we've got the Turnbull government's first Mid-Year Economic & Fiscal Outlook due out this week. I would imagine it will look bad in terms of a larger budget deficit, as neither spending cuts nor new taxes have been a focus for this new government, but as we saw with the event that really tainted Hockey's legacy and potentially the entire Abbott government's legacy, it's in the way that you sell a budget not necessarily the detail that will drive business and consumer sentiment that follows.

Today's last chart is the AUDUSD, which will be interesting to watch this week. The US Federal Reserve will announce its rate decision and follow it with a press conference from 6am Thursday, Sydney time. The 25 basis point hike to an official target rate of 50 basis points is currently 79.4% priced into the cash futures market. The announcement of this move will have the ability to wash out all of the bets that have been made on this decision, both for and against. The one certainty will be a temporary increase in interest rate and FX volatility, but where prices will trend following the decision is very hard to predict. I am in the camp that is guessing that a 25 basis point hike announcement will help the US dollar index put in a last, short, sharp move higher, before it begins to deflate over the medium-term, which would ultimately set the AUDUSD up for a move higher in 2016. But it's often the case that the potential return relative to the volatility makes a very poor investment case for trading around decisions like this - hence a lot of investors squaring up holdings coming into the announcement.


Source: Rivkin, Saxo Bank

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This article was written by Scott Schuberg, CEO of Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3600.

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