IG Markets - Morning Thoughts

IG Markets - Morning Thoughts

With a plethora of US data overnight, investors could pick and choose which ones to follow. Everyone was watching the durable goods orders and the Chase-Schiller price index, and they didn’t disappoint, jumping up strongly in the month of February. This was all the US markets needed to put the previous two days of European political risk to the back of mind their minds.

The Dow closed at a record high, adding 0.77% to be 14559, while the S&P 500 gained 0.78% to sit within one point of its record closing print of 1565, finishing at 1564. The manufacturing data also helped the S&P GSCI index of commodities advance for the third straight day. Natural gas was the biggest mover in the index, as short-term weather forecasts suggest the US is in for a colder-than-expected spring.

It wasn’t all good news in the US; consumer confidence data for February fell on the back of the bickering in Washington, and the failure to stop sequestration coming in to law. The other side of the housing data coin was also disappointing with new home sales dropping to 411,000 compared to forecasts of 426,000 and the previous month’s 431,000.

It is a good to see some positive leads coming out of the US again; data over the last six weeks has, in general been positive. In the next two weeks US reporting season will kick off once more with bell-weather stock Alcoa the first cab of the rank. It will be interesting to see if bottom-up views can replicate what the top-down views have been reporting. This might be all that is needed to kick-start the next leg up.

Moving back to Asia, and yesterday saw Japan continue to talk tough about stimulus without actually doing anything. Governor Kuroda touted every tool in the shed to see Japan returning to two per cent inflation without actually agreeing or committing to any of it. If the Abe government is going to keep the yen down, it is going to have to pull the trigger sooner rather than later, as investors are going to start calling its bluff. Traders believe we will see the ¥14 trillion stimulus package starting in June or July, but the US-style bond purchases touted yesterday are a long way off. The sooner Japan gets this going the better.

Japan’s stimulus will help Australian resource companies that have an Asian focus, particularly energy exporters (i.e. OSH and STO). There is no doubt Asia is looking for alternate energy supplies away from coal and uranium.

However, the push-back for exporters is the strength of the Aussie dollar. Yesterday Governor Stevens’ ‘no comment’ speech at the annual ASIC conference saw the swaps market pricing in a probability of a rate cut next Tuesday at 14% (I actually thought this would be lower). On a short-term view, the swaps market is calling a 32% chance of a rate cut.

This saw AUD/USD jump 0.3% overnight and is now within 0.1% of the two-month high. No more can the Aussie dollar strength be seen than with AUD/JPY reaching ¥99.2 overnight, and is honing in on the recent high of ¥99.97. If this level is broken, then the July 2008 high of ¥104.50 is well and truly on the cards, and will take some of the shine off these Asian-focused exporters.

Looking at the open, we are calling the ASX 200 up 10 points to 4960 (+0.2%), which is quite at flat call considering the strength out of the US, and the fact commodities moved higher. BHP’s ADR is suggesting the stock will add 0.6%, up 21 cents to $33.13 today, and should lead the materials space higher after being hammered yesterday. Another stock to watch is FMG, having dropped below the magic $4 mark over the past few days. Brokers are starting to upgrade their outlook on the stock, with JP Morgan upgrading their call to overweight from neutral, with a price target of $4.70. FMG has dropped 27% since mid-February, and on a bottom-up view FMG will appear cheap.

With materials looking positive, the drag on the market will mostly come from defensive plays. Woolworths and Wesfarmers have been quite resilient over the past week as has Telstra and the banks; selling here may explain the fact we are calling the market up only 10 points.

With Easter fast approaching, volumes all week have been low and we would expect that to continue today as several investors will be away from their desks already. Do not be surprised if this trend continues next week, with Easter Monday eating up another trading day. Watch for positions to be wound up today and tomorrow as people close out early as they head off for an extended long weekend.

www.igmarkets.com

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