How much further can market rally?

In broad terms firm markets are taking new highs – and there are a few new grey swans to think about. This is according to Mark Wilkes, Senior Derivatives Trader at GT247.com, who questions how much further the markets can appreciate given current market stimuli, concerns and speculation.

Wilkes says today further stimulus is entering the market- this time from the Japanese. “With the markets having been on a tear since Draghi’s ‘’whatever it takes” speech the question is how much further will the appreciation go? Once you get around the fact that in the short to medium term the cost of funds is negligible the direction of the asset prices is clear. Why would an investor put money in the bank and earn low yields as opposed to the equity market where yields are higher and look to remain intact?” he says.

According to Wilkes, two stock market adages are competing at the moment- buy the high or sell the fact?

Wilkes says on the JSE the key indices continue to make new highs. However, he warns that the story with the underlying stocks is more complex, with rotations between sectors beginning to push prices around quiet a lot. “Diversified miners have been taken up from lows, as have many platinum sector shares despite the implications of the Marikana tragedy. To a certain degree the disquiet in South African miners has been over taken by a broad risk switch into resources- and this is what usually happens when QE strikes the markets,” he says.

According to Wilkes, the other areas of concern are the Japanese/Chinese debacle over the Pinnacle Islands, the rotation of leadership in China, the US election and looming fiscal cliff, and the potential for Eurozone developments concerning  a Spanish bailout.

“The Middle East is entering a new phase pre the US election, with relationships between Tel Aviv and Washington at all time lows, Israeli fears concerning Iran, and Muslim backlashes concerning an outrageous offensive movie.  In addition bullion is starting alerting us to the prospects of some serious inflation concerns down the road,” he adds.

Wilkes says with the EUR:USD stable at over 1.30 and the dollar index a little on the back foot  it is a huge debate as to how much further upside the EUR has in the short term. “Unlimited peripheral short dated bond buying should stop too much downside- the secret will lie with the perception of the dollar,” he says.

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