Equity markets rally and oil jumps 10% on Friday night, ASX futures up 55 points

At times the US dollar sets the short-term trend in equity markets, at other times it's the Chinese stock market. It seems oil was the 'catalyst du jour' on Friday and ~10% gains in both WTI and Brent crude reversed the previous 10-day sell-off in oil markets, with both benchmark measures shooting quickly back over US$32 per barrel. Today's first chart illustrates this, and it seems that equity markets--which, let's remember, had been handed a bullish close on Wall Street on Wednesday night--used this oil rally to find confidence and rally also. Most European markets were up over 2%, with France and Spain up over 3%, and the S&P 500 closed over 2% higher in New York. The ASX 200 already put in a 50 point rally on Friday, but nonetheless ASX futures have added another 55 points overnight and this will get us back a bit closer to 5,000 today. I think at an index level the market will remain a little vulnerable until it rallies back above the August closing low just above 5,000 points and closes above that level convincingly for a few sessions.

So is this the beginning of the big relief rally everyone has been waiting for? Nobody knows, and this is why I've been pretty consistent in my view when it comes to sticking to this market through the current rough patch. Sometimes it feels horribly--and sometimes irresponsibly--cliche to tell members to 'just stick with your strategy' throughout times like this, because you think of so many complacent financial advisers in 2007/08 who unwittingly guided their clients into the abyss. But the overwhelming point that I am making when I say this is that to time and exit and then time a re-entry in the future is significant form of speculation; and if you have a portfolio set up that suits a long-term conservative investment style, there is usually no need to speculate like this. It might feel good to jump in and out of markets at the perfect time and be able to tell your mates that you nailed it, but that's just a sugar hit to your ego and will serve you well in the long run only through luck.

Make sure you consider what it is that your portfolio is meant to do for you and write it down. It might start as simply as one sentence, "To provide a post-tax income of $30,000 per annum from a $400,000 initial investment, and to preserve 80% of that initial investment." If you have something even as simple as this to guide you, you'll be able to ask yourself whether your portfolio is doing its job or not at any given time, and then only make changes when necessary. In this instance, one might invest in large companies with average franked dividend yields of 7.5%+ and then switch to government bonds if a fall of 20% realised to the portfolio's value. You might then sit in government bonds--and add to that capital when you're able--until you build up enough of a buffer to re-enter the stock market again, allowing you to stick to the original minimum of 80% of your $400,000. (Obviously this is an example that constitutes general advice only.)

Non-services Japanese trade data will be posted at 10:50am Sydney time, with some German business confidence survey data out at 8pm tonight. The Aussie dollar is back up over US$0.70 and there is a 20% expectation of a rate cut priced in for February, with those expectations building toward mid-year. It's worth noting that, irrespective of global equity market volatility, there's no sense in cutting rates in Australia if consumers and businesses won't respond to those lower rates. It would be much better to have an economy operating on rates that are at a level that won't create the kind of anticipation that we saw in the US when there was 'lift off' above zero. In that sense, I think the Aussie dollar might remain well supported and the shape of the 30 day interbank cash rate futures curve will begin to reflect less of an expected fall to 1.75%, which it is current projecting for July/August.

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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