IG - Morning Thoughts and Opening Calls

IG - Morning Thoughts and Opening Calls

On-again, off-again political turmoil in Europe, coupled with political wrangling in Australia has led to a very unstable 36 hours of trading in global markets.

After investors speculated on Thursday night that the ECB would provide stimulus to Cypriot banks in the short term, this timeline has been cut even shorter - leading to increased volatility and political risk, as investors sold off European markets.

The ECB has stated that it will cut emergency funding to the island nation on March 26 (four days from now). This cut-off happens to coincide with the end of the forced Cypriot bank holidays; there will be mayhem if no deal is done. 1.1 million people will be running to their local bank to withdraw every coin they have if no deal is agreed upon.

Traders will need to make a tactical decision about holding risk currencies (i.e. EUR/USD) shorts into the weekend, because a positive resolution and a last-minute agreement from the ECB to provide liquidity to the banks could see risk currencies pop on Monday. On the other hand, a failure to come up with a plan could be very good for EUR shorts indeed.

The other disappointment over-night was German manufacturing data, which unexpectedly contracted, dropping to 48.9 after having moved into expansion in February. This data saw the European carmakers gauge post the worst performance of the 19 industry groups in the Stoxx 600.

The US on the other hand started the day chasing all-time highs, with the Dow reaching another intra-day all-time high, before pairing gains in the afternoon and pushing lower as the European debt crisis trumped the better-than-expected Philly Fed manufacturing numbers, which expanded. At the close, the S&P lost 13 points to be 1546, with raw materials dropping the most; not a great lead for the ASX 200’s second major sector, having already been beaten up so many times over the past four weeks.

Moving to the Australian market and we have now pulled back 204 points since the intra-day high of March 12, which is a 3.95% correction - we need 5% to make it an official pull-back.

With shenanigans in Canberra subsiding before they even started, the political risk in this country will continue all the way to the September 14 election. Nothing has been resolved and innuendo and rumour will continue. What we are concentrating on are the financial public servants, and their effects on the local market.

This week was all about deputy governor Mr Philip Lowe’s address to the Australian Industry groups’ annual economic forum; his speech shed light on the RBA’s current perspective on the Australian economy. There is no doubt that his speech on Tuesday was neutral to slightly dovish, but he did see green shoots, and that interest rate cuts were working. His speech went hand-in-hand with the monetary policy minutes, which showed a neutral view with the ability to push the interest rate button if needed, but unlikely in the short term. This is why the Aussie dollar remains strong despite the political risk of yesterday. Plus, yesterday’s Aussie bond sale was highly bid and very strong; these two alternative investment vehicles will drag on the ASX 200.

Moving to the open, we are calling the ASX 200 down 36 points to 4923 (-0.73%), and this will mean the pull-back will now be 237 points from the intraday high - that’s a 4.6% pull-back. BHP’s ADR is suggesting the stock is set to continue to lose ground, down 12 cents to $33.37 (-0.34%), and after US raw materials lost ground there will be a broad-brush loss in the materials space. Banks may also struggle today with Cyprus flare-ups. The banks rallied yesterday, however with broker downgrades through the week and global uncertainty, we may see a pull-back to end the week.

As I stated earlier in the week, with no major news to see the market leg higher in the short term, we would expect this sideways movement to continue, if not to pull back further. With today being Friday and with so much uncertainty in the northern hemisphere, the sell-off today may be stronger than called, as investors close out to avoid being burnt over the weekend.

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.

Please contact IG Markets if you require market commentary or the latest dealing price.

ENDS

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