IG Markets - Morning Thoughts

IG Markets - Morning Thoughts

More good news - economic data is once again front and centre, with US unemployment claims unexpectedly falling more than forecasted, and people filing for claims down 22,000 to 344,000. Germany also experienced a fall in unemployment last night, amid signs the largest economy in the eurozone is returning to growth after shrinking at the end of last year. These data releases back the previous figures that showed promising strength in manufacturing, budding optimism and increasing housing activity on both sides of the Atlantic. Heading into the close, the S&P 500 was up five points (+0.32%) to 1520 and is heading back toward its all-time high.

However, once again political risk is playing havoc with the markets - this time in the US.

I haven’t talked much about sequester, which is the $85 billion worth of automatic cuts to government spending. The origin of these automatic cuts rose out of the 2011 ‘grand bargain’ on taxes and spending; the idea was that they would be so onerous that neither party would allow it to come to pass.

Well that looks like it may have been too optimistic; neither bills presented by the Republicans or the Democrats today have passed the Senate. Looking at the intraday charts of the Dow and the S&P, each bill failure saw the market drop like a stone, particularly when the Democrats’ bill failed at 2:30 pm EST (US). Policy-makers hadn’t expected the bills to pass though, and it now looks increasingly likely that the sequester will kick in and will take a blank cut to domestic and military spending. To give you an idea of the effect this will have on the US economy, the non-partisan Congressional Budget Office estimates that budget reductions will cause a 0.60% reduction in economic growth this year.

This will have several effects: one, it will hit leading indicators that have buoyed markets over the last month or so, with the likes of business confidence, consumer confidence and employment optimism almost likely falling on these cuts. And two, it will see a large chunk of funds coming out for consumer spending, which will in turn affect job security. Markets will react poorly to this political impasse and it looks like it will start with the Asian market this morning.

What might balance out this political issue is regional news and data. Yesterday saw the official releases of one of the worst-held secrets with Prime Minter Shinzo Abe nominating Mr Haruhiko Kuroda (current head of the Asian Development bank) for Bank of Japan Governor position, which the markets took in their stride. Today, China will take centre stage with the release of its manufacturing PMI data. Clarity over China’s short-term direction will remain clouded until the finalisation of the leadership handover takes place, with the country stumbling (slightly) after the Flash data released on Monday was disappointing. I would not be surprised to see these figures slightly dampening the market as well. On a medium-term view however, China is definitely looking stronger.

Moving to the open, we are calling the ASX 200 down 19 points to 5087 (-0.37%) as we open the autumn books. Having watched the last twenty minutes of US markets, this pull-back may actually be stronger than this call; it is the end of the week and investors may cash out to see what takes place in the US over the weekend. The materials space looks like it will pull back today, with BHP’s ADR suggesting BHP will drop 39 cents to $36.68 (-1.05%), as the risk trade switches off. I am not concerned by another possible pull-back; it is healthy and required for longer-term strength. The question will be how strong is the pull-back going to be? I would not expect anything more than 4% to 5% as the buying strength on the dips is providing incredible strength to the market. Yield stocks should support the market today as people continue to hold the income play. All have provided very good shareholder-focused returns this season, and this should bode well for them in the short and medium term.
Market Price at 8:00am AEST Change Since Australian Market Close Percentage Change
AUD/USD 1.0219 -0.0059 -0.57%
ASX (cash) 5091 -13 -0.25%
US DOW (cash) 14054 -31 -0.22%
US S&P (cash) 1516.2 -4.4 -0.29%
UK FTSE (cash) 6357 -9 -0.15%
German DAX (cash) 7749 30 0.39%
Japan 225 (cash) 11521 8 0.07%
Rio Tinto Plc (London) 35.41 0.06 0.17%
BHP Billiton Plc (London) 20.89 -0.07 -0.32%
BHP Billiton Ltd. ADR (US) (AUD) 36.26 -0.81 -2.19%
US Light Crude Oil (April) 91.86 -1.17 -1.26%
Gold (spot) 1580.95 -17.6 -1.10%
Aluminium (London) 2007 -15 -0.76%
Copper (London) 7815 -87 -1.10%
Nickel (London) 16622 -189 -1.12%
Zinc (London) 2265 -57 -2.47%
Iron Ore 151.7 -0.2 -0.13%

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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