IG Markets - Morning Prices Feb 25

Friday closed the book on some very impressive upward records.

The S&P 500 ended the week 0.3% down (shortened due to President’s Day) to 1515 points and snapped a seven week winning streak - its longest tear since January 2011. The ASX 200 almost held on to its tear away run, looking for six straight winners, however it finished the week down 0.3% to 5018 points after being ahead of last week’s close around 1pm on Friday, ending the run at five. However, it still means 12 of the last 14 weeks have been positive.

Europe on the other hand snapped its three week losing streak. German business confidence figures came in ahead of expectations and ran over the concerns from the day before that the US Federal Reserve will cut back its stimulus spending. This saw the DAX and the CAC back in the green, adding 0.9% and 1.3% respectively as Italians went to the polls. No major winner look to be announced, but it is clear that markets will probably react in two distinct ways depending on the results.

A Bersani-led coalition (centre-left) is expected to win with current technocrat Prime Minister Mario Monti expected to form a coalition government. It is expected to hold the current economic rigor in place and continue to deregulate Italian finances. Markets expect, and want this outcome.

On the other hand, a Berlusconi-led government will cause market destabilisation, as his centre-right party has committed to rolling back current tax increases and reviewing the rise to the retirement age. This could see Italy returning to the days when its borrowing rates were up around 7.5% and unemployment was near 12%.

However, here in Australia we have no real connection to the issues in Italy other than the fact it will most likely impact European sentiment, which tends to be a very soft lead for our market. What we concentrate on is the region that matters - Asia Pacific.

What will affect us this week is regional news; most notably, Chinese data. Today sees the release of HSBC flash manufacturing PMI figures, which is expected to expand for the fifth straight month and should help the beaten-down material space. Investors will be taking to BHP, RIO and FMG with clubs after missing key figures in last week’s reporting season. Increases to Chinese manufacturing will provide a boost to these stocks. This Friday the official manufacturing figures will be released and if they confirm the flash figures from today, fears of a hard landing will be alleviated, plus it will confirm that Asian manufacturing is back online in a big way.

The other major player in our region this week will be Japan. A plethora of Japanese data is due out, including retail sales, industrial production, housing starts and Tokyo core CPI figures, which all should start to show the effects of increased confidence in the country and the lower exchange rate.

What will cause the biggest jump in Japanese investor activity will be the appointment of the new Bank of Japan governor. There are major rumours coming out of Japan with a least three different news agencies, including Reuters, stating that Mr Haruhiko Kuroda is now front runner with some agencies reporting that he has actually been invited to take the position. Kuroda will be the market friendly candidate, however there is still resistance to his appointment. The announcement could be out as early as today, so watch for USD/JPY, EUR/JPY and even AUD/JPY to run away if it comes. This will also have a dramatic effect on the Nikkei. The currency/market correlation will take off on this appointment which will impact on our market sentiment and should see the ASX higher as well.

Moving to the open, we are calling the ASX 200 up 9 points to 5025 (0.2%), however be careful here as several pieces of major data may not have been factored into the pre-match (i.e. the downgrading of the UK’s credit rating by Moody’s). Also, the local earnings season is winding down this week, with the only major players releasing figures being Woolworths, QBE and Oil Search. BHP looks like it will stabilise today with its ADR flat and unchanged from Friday night’s close after dropping $2.47 (6.2%) since Wednesday’s results. Heading into the close of February, the positive start to the year looks set to remain. Looking to March, the question will be; can the current momentum and goodwill remain?

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