IG - Morning Thoughts and Opening Calls

IG - Morning Thoughts and Opening Calls

Once again, bottom-up views continue to miss analysts’ lofty expectations. US stocks gave back every single gain from the night before as the likes of BoA Merrill Lynch, Apple and eBay all missed vital estimates. All ten sectors in the S&P fell overnight, led by technology, energy and financial shares, and that does not bode well for the ASX which is dominated by energy and financials stocks.

It is hard to put your finger on any one reason for the current sentiment; there is no doubt it is negative and that is not surprising considering the macro data of the last few weeks, and the fact that US first quarter earnings are collectively underwhelming.

So what is driving this sentiment?

Downgrade after downgrade to China’s economic growth is one factor driving sentiment; most investment houses moved very quickly on their outlooks for China post its Q1 GDP data. All have slapped down their calls and now the World Bank and the IMF have also downgraded their calls on the world’s second largest economy ‘as it is slowing at a faster rate than expected’.

The Federal Reserve has also publicly stated that US growth is remaining stubbornly ‘moderate’. This somewhat contradicts the Beige Book’s findings, that signs of growth in the key areas of manufacturing, housing and auto-construction are taking shape.

However, it is the historical mood indicators that are really concerning. For the last three years, all short-term declines have started in April, and the US even has a term for it - ‘spring break’.

In 2010, the S&P fell 16% from the high in April, before rebounding on July 2. In 2011, April 29 was the high of the market and it slid 19% before bouncing in October. Last year the index fell 9.9% from the April 2 high before rebounding on June 1.

Having a look at the S&P this time around, is the April 11 high of 1593 the start of ‘spring break’? It certainly feels like it.

Moving back to domestic news, and there is an abundance of quarterly production and sales results today, plus a half-year earnings report, which includes: FMG’s 3Q production numbers, Woodside’s 1Q production numbers, WES 3Q sales figures, ILU 1Q production numbers and finally BOQ’s 1H earnings. It will be a busy day for bottom-up stock pickers considering we have already seen production reports from the likes of BHP and RIO, both of which were just in-line. AGO (FMG’s major peer) actually missed guidance once you drilled down into the results and overlooked the ‘record shipment’ headline, this is why it fluctuated 8% over the trading day yesterday.

Ahead of the open, we are calling the ASX 200 down 35 points to 4970 (-0.70%) as global sentiment drags on the market. Industrial metals such as copper, nickel and aluminium were smashed overnight and will see the gyrations in the materials sector continue. BHP’s ADR is suggesting the stock will shed 91 cents to be down 2.85% to $31.15, pushing it through the July 2012 low. Chart retracements are calling BHP back to $27.10 - a level not seen since 2008. Watch for a bounce here, as BHP has tested the $31.45 level three times already, and every time it has held; today might be the first time it loses that battle.

Brace yourselves for an indiscriminate sell-off today as the flight to safety looks to be into bonds, not equities.

Market Price at 6:00am AEST Change Since Australian Market Close Percentage Change
AUD/USD 1.0293 -0.0063 -0.61%
ASX (cash) 4970 -35 -0.70%
US DOW (cash) 14614 -115 -0.78%
US S&P (cash) 1549.9 -18.1 -1.15%
UK FTSE (cash) 6248 -69 -1.09%
German DAX (cash) 7523 -177 -2.30%
Japan 225 (cash) 13265 -118 -0.88%
Rio Tinto Plc (London) 28.56 -1.07 -3.60%
BHP Billiton Plc (London) 17.79 -0.63 -3.41%
BHP Billiton Ltd. ADR (US) (AUD) 31.15 -0.91 -2.85%
US Light Crude Oil (May) 86.70 -1.94 -2.19%
Gold (spot) 1373.40 0.4 0.03%
Aluminium (London) 1892 -18 -0.95%
Copper (London) 7045 -220 -3.02%
Nickel (London) 15446 -281 -1.78%
Zinc (London) 2020 -19 -0.94%
Iron Ore 139.30 -0.1 -0.07%

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.

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