Most equity markets weaker, oil continues to fall, the 2014 disinflation theme continues - ASX futures up 1 point

There was a lot of diversity in global equity performance last night. The Russell 2000 list of US small caps & the NASDAQ finished around 0.2% higher while the Dow Jones lost the most ground, down 128 points or 0.71%. Today's first chart shows the diverging returns of the very big end (Dow Jones in black) and small end (Russell 2000 in orange) of the US market, which is an interesting theme to me. Why? For over six years now, easy monetary policy in the United States has made it quite simple for large investors to borrow cheap and bet big with limited risk (with the Fed consistently telegraphing their intentions and keeping rates low), but smaller businesses that lack the resources to exploit such arbitrage opportunities simply want the economy to get better so they can attract more customers and make more from them on average. It's possible that the unwinding of that easy trade will see the US become more of a 'stock-picker's' market that no longer relies on the big end of the listed economy perpetually rising.

It is not as though the small end has been missing out on performance (today's second chart shows the Russell 2000 leading both the S&P 500 and Dow Jones since the October 2007 point when things started to shake); however, low risk-free yields are prevalent now and if the S&P 500 and Dow Jones are toppy, then it's likely that investors have gotten lazy and have made the assumption that they'll keep making money from the whole US market going up. Now once again, the US small cap index does not outperform when it comes to income so yield fundamentals won't be attractive - the Dow's average trailing yield is 2.49%, the S&P 500 is 1.98% and the Russell 2000 is 1.29%. But if--again I'll use the Sydney housing market analogy--investors have been relying upon the capital growth of big caps in the US for returns and ignoring the income fundamentals, they may well switch into the lower-yielding NASDAQ and Russell 2000 shares if they believe the the larger indices have rallied enough and that value might be discovered elsewhere. Price earnings estimates for the NASDAQ and Russell 2000 are marginally higher than that of the S&P 500 and Dow, but a belief that stocks in these indices may benefit more greatly from a US economy without continual monetary stimulus might be enough to see money rotate out of the larger caps on a more speculative, bottom-up basis.

Professional economic sentiment--via the ZEW survey--was quite a bit lower than expected in Germany last night, which dragged European stocks lower. This may well be related to the fact that the ECB stimulus plan goes against the wishes of the majority of the German people, given they are not weighed down by as much debt as many other Eurozone nations and thus--while being the largest member to fund the program--will not enjoy the commensurate benefit. Nonetheless, the US$1.05 level of the euro should benefit Germany the most - so we'll stick to our guns on (selectively) making that the medium-term pick of markets over there.

Oil markets continued to fall, with WTI crude now at US$42.68. Today's last chart shows that WTI (black) is back at its recent lows, while Brent (orange) is still US$6 or so off its January lows. The perseverance of low oil prices will surely play on the minds of US central bankers as they meet up and produce their thoughts via Janet Yellen's press conference, at 5:30am Sydney time tomorrow. It will certainly frustrate Japan's ambitions of higher inflation, and should concern the US too if they were otherwise planning on using some inflation logic as an excuse to increase rates. Anywhere you look (at inflation), the low oil price has had significant effects on weakening inflation and WTI's latest nosedive in the US should push consumer prices (or at least expectations for now) lower. When you look at the commodity section of the Global Markets matrix below, you can see that the rolling 30-day trends are not looking great for most commodity markets, with oil markets taking the biggest turn since they looked to be making a recovery in February.

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Upcoming economic announcements: Westpac leading index at 10:30am (AU), UK employment report at 8:30pm, US Fed rate decision and press conference at 5am/5:30am, all Sydney time.

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