IG Markets - Afternoon Thoughts

IG Markets - Afternoon Thoughts

Asia has shown once again that it is not just a reactionary time zone, and can throw up a few surprises of its own. While the political issues in Cyprus roll on, albeit slightly more constructively, it is down to Australia this time to steal the limelight from a political standpoint.

Today was one of the most explosive political plays in recent months and it seems that political risk in Australia has once again skyrocketed. Simon Crean, former leader of the Labor party, has finally called out what has been coming for weeks – a leadership spill. He has called on the Prime Minister of Australia to call a spill, to which she has agreed, and at 16:30 AEDT Australia should have a new Prime Minister. This could mean Kevin Rudd will return to the position that was ripped away from him in 2010. This move has, and will continue to increase the political risk in Australia. The likelihood of a September 14 election now looks slim, despite assurances, as the reaction from the independents is not fully known. This will cause jitters in the local market which can be seen by an initial fall in both AUD/USD and the ASX 200, although the index has picked up and is now firmer by 0.3%. We will watch and wait as the event could cause the house to split and would send the Australian public to the polls sooner, rather than later.

Australia aside, and the focus continues to be on Japan with the Nikkei printing another higher high. Early in the session we got the latest read on the Japanese trade data and at ¥777.5 billion; the print came out modestly below expectations, with the breakdown for exports perhaps a little lower than the market had hoped. The market is now firmly focused on Haruhiko Kuroda’s first press conference (expected at 20:00 AEDT), and while Mr Kuroda shouldn’t give too many specific details away today, there is talk he may provide hints as to the policy framework the BoJ will announce in the April 3 and 4 meeting. There is already heightened speculation the bank could extend the duration of its JGB (Japanese government bond) holdings to five years from three years, while importantly we could hear that it may bring forward the ‘open-ended easing’ to an earlier date than 2014. We still like USD/JPY on dips and feel a break of the March 12 high of 96.71 could be on the cards soon. Certainly it is dangerous to short the pair given the headline risk that hits the wires constantly, and from this perceptive the BoJ has done a fantastic job.

After all the excitement seen in the Chinese market yesterday, the Shanghai Composite has only managed a 0.2% gain even though the HSBC flash PMI print grew at a faster-than-expected rate. Certainly our European opening calls haven’t received the same boost as they did yesterday. While we felt the key story was talk that smaller banks may have more freedom to ease their loan to deposit ratios, some traders pointed to Tom Demark who suggested his technical indicators see a 48% upside.

Given the BoE minutes and UK Budget announced yesterday, Asian traders haven’t done too much to push sterling around today. Perhaps the minutes were less dovish than some had expected, but the Budget has the premise to have far reaching implications on future policy. Perhaps there were some hoping that George Osborne would allow the bank to go all out and use ‘Abenomics’ as a guide, however, what we are left with is a bank that will decide in August whether to align itself with the Federal Reserve and have an outcome-based approach for policy. We still feel cable has downside risks, and although consensus sits at 1.52 for Q4, we believe 1.45 could be on the cards. UK retail sales could spur buying in the FTSE and sterling if results beat the 0.6% consensus today.

The Cypriot issues are still there, but clearly most in the market are trying as best they can to move on. A number of new plans have come to fore most of which include Russia. Whether that includes Russia loaning the required capital to Cyprus (which in turn could also increasing its debt/GDP significantly enough to upset the IMF), or even doing a deal involving Cyprus’s gas reserves is yet to be seen. At the end of the day, global investors are happy to put money to work as long as the central banks are still in the market and they maintain that a Cypriot default is not their base-case.

On the subject of the Fed, perhaps last night’s meeting was the most market-friendly outcome we could have hoped for. We heard the board providing a slight improvement to its employment forecasts, but not enough to turn hawkish, while lowering core CPI and growth, but again not enough to kill sentiment. One of the hawks even threw in the towel on tightening policy this year. A closing high on the S&P 500 at 1565 is a stone’s throw away, but then again an all-time high on the DAX is only about 2% away as well. Perhaps a good number from the US Philly Fed, existing home sales and leading indicators could spur the markets on, although positive manufacturing and services PMI in Europe could get the ball rolling.

Ahead of the open we are calling the FTSE 6427 -5, DAX 7995 -6, CAC 3820 -9, IBEX 8390 -26, MIB 15990 -25

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