IG Markets - Afternoon Thoughts

IG Markets - Afternoon Thoughts

It’s all about the DOW, and now we work on projections rather than retracements, although price action in the FTSE and CAC also looks pretty constructive. Only the DAX failed to close above its January 28 high of 7871, with the index closing one point shy. Our DAX opening call suggests the bulls will have to find some inspiration from somewhere if the market is going to settle above 7871 and print a higher closing high. We suspect that inspiration will have to come from the US.

We have spoken about the strength in global equities, and while we prefer to look at the S&P 500 as it is a market capitalised weighted index (as opposed to price), the question ask is, now that the DOW has printed a new high, will this bring even more retail money into the market? And subsequently, will this be the trigger for institutional traders to take some off the table? We are confident of the former and unconvinced of the latter. However, looking at any broadsheet or tabloid in the US, the fact that after 1357 days the Dow Jones has recouped all its losses is getting a lot of airtime. The S&P 500 closed at 1539, which is above the recent interim high and trend-line resistance drawn from April 2012, and now has its eyes firmly on 1576. Perhaps the upcoming raft of US data prints could be the trigger, with traders eyeing the ADP private sector payrolls (expecting 170,000 jobs), factory orders and the monthly Beige book. We will also be keeping a close eye on the ADP payrolls and the corresponding price action on the USD trades if we get an above consensus read, given we are seeing evidence that the market wants to treat it as an asset currency and not just a risk on, risk off play.

The fact that US futures are unchanged is testament that Asia is in reactionary mode and pushing up on the back of the overnight leads. The ASX 200 opened on a firmer footing and found a new wave of buyers after the Q4 GDP print came in-line with expectations with upward revisions to Q3. The quality of the growth was perhaps not that brilliant as this was not a story of private sector demand, but government spending and export growth. Inventories, as expected detracted 0.4%. It was our belief that the RBA was done cutting for now given yesterday’s RBA statement. With growth running around trend at 3.1%, you can see why the OIS market reacted and is now subsequently pricing in thirty basis points of cuts over the next twelve months.

We recently highlighted the strength shown by the bulls on the break below 1.0149 with the pair printing a hammer exhaustion pattern, and after today’s GDP print, AUD/USD has broken the downtrend drawn from the January 21 high at 1.0265. A close above the downtrend and subsequent close above the 38.2% retracement of the same move at 1.0300 would be worrying for the RBA and Wayne Swan, although we’re not sure how closely they would watch the technicals.

Japan and China have also found buyers today, and you can add the Nikkei into the list of indices that are breaking out. In China, even the property sector has found buyers (currently up 1%), helped by one local analyst saying property stocks were cheap. It seems the 55-day moving average is the line in the sand for the Shanghai Composite (the 55-day currently 4921). While the index finds buyers at this level, it has to be said that the market is finding more positives in Premier Wen’s address yesterday. With the government setting a fiscal deficit of Rmb1.2 trillion (or 2.1% of GDP), this is a descent increase from the Rmb800 billion (1.5% of GDP) announced last year, while there have also been proposed expansions to deficits on a local government level as well. With M2 targeted at 13% YoY, (compared to 13.6% in 2012), it seems we are seeing expansionary fiscal policy amidst a backdrop of a continued prudent stance on a monetary level. Very wise indeed given the backdrop.
So, we come into the business end of the week with regard to macro-economic risk. As detailed, the ADP payrolls report will hopefully continue to predict a solid non-farms payrolls number on Friday, after yesterday’s employment sub-sector of the services ISM showed good expansion at 58. Additionally, Fed Presidents Charles Plosser and Richard Fisher will give speeches. Currency traders will keep a close eye on narrative from the Bank of Canada after a pullback in core CPI (now 0.1% versus 2.3% a year ago) and a soft recent GDP print. Given most of the rhetoric from the bank over recent times has been about tightening policy if household debt doesn’t show signs of abating, perhaps the trend of poor data points could be the trigger to move to an outright neutral bias. We feel there are traders positioning for this and if the BoC does return its mildly hawkish bias, then USD/CAD could fall the February 28 low of 1.0217.

The big central bank meetings come tomorrow though, and we feel the ECB meeting has the premise to really throw up some added volatility. Will it signal easing down the line or will the ‘green shoots’ of a recovery that the ECB economist Peter Praet recently portrayed keep the bank from lowering its current forecasts of 1.6% (mid-point for 2013)? As we detailed earlier in the week, we feel traders could look to sell EUR/USD on a close below 1.2998, however this hasn’t materialised, and we feel there is a possibility EUR/USD actually finds buyers going into the decision.

Ahead of the open we are calling the FTSE 6421 -10, DAX 7857 -13, CAC 3779 -8, IBEX 8417 -6

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