IG Markets - Morning Thoughts

IG Markets - Morning Thoughts

Overnight, the S&P 500 was little changed as investors weighed up global economic concerns with better-than-expected unemployment claims and increased M&A activity. Fewer people than anticipated filed for unemployment benefits over the week with only 341,000 people compared to the forecasted 361,000.

Meanwhile, Warren Buffet’s Berkshire (along with 3G) stepped up its holdings in all things food related with a takeover bid of Heinz, worth approximately $12-$13 billion (or $72.50 per share). However, these results were overshadowed by GDP numbers out of Europe. Heading into the close the S&P was slightly higher at 1521 points as it looks to finish the week at five-year highs.

The euro fell against 16 of its major peers as both Germany and France, the two biggest players in the zone, released GDP figures that missed guidance. Germany contracted by 0.6% (versus -0.5% forecasted) while France contracted 0.3% (versus -0.2% forecasted). Italy dragged on the region even more, contracting 0.9% (versus -0.5% forecasted), which led to a combined contraction of -0.6% for the economic region (well ahead of the 0.4% expected). This is the worst result out of the eurozone in almost four years, and illustrates that Mario Draghi’s call that the zone is stabilising gradually but the situation is still fragile is probably the right call. The levers in the ECB’s back pocket are there and finances in the private banking sector look to be improving with the increased repayments of the LTRO loans two weeks ago. We continue to reiterate our call that Europe will be a distraction this year, not a disaster - today is a distraction. Heading to the end of the US trading session, EUR/USD was off 0.68% to 1.335.

In regional news, Japan was the main focus with the release of its GDP numbers and official interest rates. Japan’s economy unexpectedly shrank last quarter as exports and business investment slumped, with GDP contracting 0.6% versus the 0.4% contraction expected. This result bolsters Shinzo Abe’s claims that monetary stimulus is needed to end the two decades of deflation. One Japanese analyst also recognised that these figures show only one week of Mr Abe’s rule, as he took over late last year. It will be interesting to see how the following quarter reacts with a deflated yen and a rising Nikkei. As expected, current BoJ Governor Mr Shirakawa left official rates on hold and applied no additional stimulus to the already pledged ¥10 trillion; the newly elected BoJ Governor may have something to say about this when he takes over in April.

This week saw local first half earnings season kick off in earnest and what was most notable was that CBA, WES, CSL and RIO have all brought one thing to the table that every retail investor has been calling out for over the last three years of dread – dividend growth. Yes, even RIO has upped its full year dividend by 15%. CBA started the trend with a 20% increase on Wednesday, while WES yesterday announced a 10% increase on its interim dividend compared to the corresponding half. If we drill down on the results, they have been ahead of expectations but there is no doubt that dividend growth and therefore the quasi-bond play has continued to driver our market higher.

If you look at the big yield plays such as CBA, TLS, WES, WOW, they have all outperformed. Make no mistake BHP, RIO and FMG will bounce back as more and more money starts pouring into the market, but with super contributions rising to 12% over the coming two years, dividend growth will be paramount for attracting the funds coming into the market from this stream. Today ANZ will give a first quarter update and it will be interesting to see if the Asian strategy is growing and how ANZ is faring in the war for deposits.

Moving to the open, we are calling the ASX 200 down 10 points to 5027, as European concerns put a dampener on what has been a stellar week for the local market. We are expecting to see BHP moving lower today, with its ADR pointing to a 0.45% drop to $38.72 after jumping up hard during yesterday’s trade. Even with a slight loss today, the ASX will finish the week higher, making it the fifth consecutive up week and the twelfth of the last thirteen weeks. Our market is now at levels not seen since 2008 and looks more likely to be heading to 5200 5400 points by the end of the year rather than under the 5000 points mark. The main reason for this is the amount of investors jumping in on the dips. There is no doubt investors now fear ‘missing out’ rather ‘losing out’ as dips are quickly snapped up. If local earnings follow this week’s lead over the coming weeks, the market will continued to power on.
Looking to the end of the week, watch for the Friday afternoon reweighing as investors look at China, which will come back online on Monday after Chinese New Year celebrations. CBA and TLS go ex-dividend on Monday morning, which will take 18.1 points out of the market.

Market Price at 8:00am AEST Change Since Australian Market Close
Percentage Change
AUD/USD 1.0356 0.0006 0.05%
ASX (cash) 5027 -10 -0.20%
US DOW (cash) 13977 -11 -0.08%
US S&P (cash) 1522.6 1.0 0.07%
UK FTSE (cash) 6336 -28 -0.44%
German DAX (cash) 7643 -67 -0.87%
Japan 225 (cash) 11210 -105 -0.93%
Rio Tinto Plc (London) 37.46 -0.11 -0.29%
BHP Billiton Plc (London) 22.25 0.32 1.47%
BHP Billiton Ltd. ADR (US) (AUD) 38.72 -0.17 -0.45%
US Light Crude Oil (March) 97.34 0.21 0.22%
Gold (spot) 1635.50 -10.2 -0.62%
Aluminium (London) 2153 7 0.32%
Copper (London) 8240 -5 -0.06%
Nickel (London) 18260 -153 -0.83%
Zinc (London) 2411 -4 -0.17%
Iron Ore 155.1 0.0 0.00%

IG Markets provides round-the-clock CFD trading on currencies, indices and commodities. The levels quoted in this email are the latest tradeable price for each market. The net change for each market is referenced from the corresponding tradeable level at yesterday’s close of the ASX. These levels are specifically tailored for the Australian trader and take into account the 24hr nature of global markets.

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