IG Markets - Afternoon Thoughts

IG Markets - Afternoon Thoughts

FTSE 6185 +21

DAX 7727 +25

CAC 3753 +11

IBEX 8626 +22

Oil 95.70

Gold 1689

Asian markets are mixed with no dominant theme in place in a fairly quiet start to the week. There hasn’t been any economic data to go by in the region and therefore we’ve had to rely on leads from the weekend for some direction. Risk assets were relatively mixed on Friday as investors focused on the possibility of a short-term extension to the debt limit. Democrats will be hoping the Republicans are not looking to tie this in to spending cuts. Of course US markets are closed for the Martin Luther King Day holiday and as a result we are only likely to get further developments on this issue once they return to trade. With limited leads to work on, some investors turned to Japan for some direction where big moves in the yen and Nikkei are expected over coming days. Tomorrow’s meeting should see the bank announce a 2% inflation target that it will try and achieve in the medium term. It should also announce an extra ¥10 trillion to its asset-purchase programme, although we feel these measures are firmly in the price. We believe that for USD/JPY to push markedly higher from here we would not only need US data to continue improving, but the BoJ to announce unlimited asset purchases, negative interest rates and to publically state that it intends to buy foreign assets thus creating sizeable inflows. With the real risk of ‘buy the rumour, sell the fact’ playing out tomorrow, we feel the risk could be for disappointment. However, given our longer-term bullish stance, we believe buying pullbacks could make sense.

Looking at the equities in the region, Japan’s Nikkei is down 1% following the drop in USD/JPY. The ASX 200 has managed to edge higher and is being carried by the defensive names. Elsewhere, the Shanghai Composite and Hang Seng are relatively flat. We would caution against chasing USD/JPY and yen-based crosses at current levels (89.75), as a lot is priced in and there is a real risk the market sells the pair on the fact after tomorrow’s BoJ central bank meeting. Over the weekend we heard comments from Kaichi Hamada, a key advisor of the Shinzo Abe economic team, who suggested that while he was not keen to see USD/JPY push to 110, he would be comfortable with the pair around the 95 to 100 range. This shows that one of the key architects of current policy has a specific target in mind. Risk currencies have come off their lows in Asian trade, with AUD/USD moving back above 1.05 to a high of 1.052 and EUR/USD trading to 1.332. Ahead of the European open, we are calling the major bourses higher. Leads will be limited with US markets closed and therefore Europe will be a key driver of sentiment on the risk front. There are quite a number of key events to look out for in the risk space this week, starting with the eurogroup meetings later today and German PPI.

The ASX 200 is up 0.1% at 4776 after trading at a high of 4780 earlier. NAB is one of the biggest movers in the top 10, gaining nearly 2% on talk that Spanish banking giant Santander is weighing up a £2.0 billion bid for NAB’s troubled UK assets. The UK has been a major distraction for the bank over the past seven years and has seen NAB lag behind its three main competitors by almost 20%. The possible sell-off of the UK assets would see a large write-down to NAB’s balance sheets, however it would allow it some breathing space to concentrate on its core business banking avenue. The materials space is mixed with Oz minerals being one of the better performers, jumping 3.5% after upgrading its copper deposit at its Carrapateena project in the north of South Australia. We do note that the company’s Prominent Hill deposit data met consensus, and considering OZL looks quite expensive to peers such as PanAust (PNA) and Sandfire Resources (SFR), it could experience some resistance. We also note that volumes have not increased on the announcement. Sims Metals (SGM) has also come under price pressure today, after announcing it has overstated inventories, specifically at its Long Marston and Newport projects. The overstatement is expected to come in at around $60 million. With SGM rising 17% since November, we would expect price pressure over the coming days with this shock announcement. Look for support levels of $9.50 and $8.75 to be tested.

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