Australia | Aug 01 2014
By Mathan Somasundaram, Baillieu Holst Quant Strategy
Summary: Aussie market took a beating in line with global lead. We could use everything from Argentinean football bonds, Portuguese chicken banks, hedge fund follies, US rate hikes, Russian roulettes, Middle East mayhem, African Ebola and countless market pundits with million varied views to explain the selloff. I am not that bright and prefer to keep things simple. Market has been expecting and wanting a pullback and finally the weight of so many bad news it has continued to ignore has just taken the US market to a bridge too far…and it needed to let some steam off.
It was convenient for some hedge funds that the pullback happened on the last day of the month and the level of the pullback drove the US market to negative return for the month after number of positive return months. It was also very convenient that certain global banks downgraded global equities outlook in the past week on evidence as strong as Kristen Stewart’s acting ability. But my experience tells me we rarely get a big correction in the middle of a reporting season with relatively decent macro data coming out. If there is a correction, I’d expect that to happen after the reporting season when the market is sitting in an information void with no macro/market lead.China data continues to show positive trends while US data tonight will shed some colour on US recovery.
Spot gold not moving up and the average trading volume today tells me that the market also was not convinced this pullback will last too long. We continue to feel that corporate earnings will be close to expectations (i.e. no “Valley of Death”) while low interest rates are likely to drive M&A cycle sooner than later.
Trading idea of the day: Xero Limited (XRO)…we turned positive after it was sold down below $22 with investors turning on the stock after driving it as high as $42. XRO is a NZ cloud based accounting software company that every accountant seems to love…even buying shares at $40. We see XRO value emerging as they continue to increase customer base globally with potential US listing to help the profile. It is an early stage online growth story with substantial risk, but the potential upside will drive this stock back closer to $30 in the next 12mth as market chases growth.
Market Move: Aussie market was down 1.36% with turnover was just above $4.4b.
Macro Events: Tonight – US July non-farm payrolls, US July ISM manufacturing report.
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