IG Markets - Afternoon Thoughts

IG Markets - Afternoon Thoughts

Christine Lagrade’s tweet this morning has a direct call to arms ahead of the G-20 summit in Washington this weekend.

She stated that ‘a 3-speed global economy is not enough, we need a full-speed global economy and this requires action on all policy fronts.’ This is interesting considering what we have seen this week across the global.

There is no doubt that Asia, Europe and the Americas are all in different gears.

China’s fixed asset investment remains the thorn in its side. No more was this seen than in the Chinese housing price data. The data from China’s point of view reiterates the fear that the country is overheating, from any other country’s point it was nothing short of stellar.
68 of the 70 largest cities in China saw housing prices growing by an average of 3.8%. Beijing saw a massive 8.6% growth, even with the new tightening measures in place. This will throw cold water on Chinese the growth story - its central government will want to rein this in, and fast, which will send shudders around the world.

The US continues to drag its feet; S&P 500 companies continue to miss earnings estimates, while macro data starts to soften. This has led some FOMC members to change their language once more - to further expansion, not reduction. They suggest expanding the Federal Reverses balance from the $85 million a month in treasuries and mortgage-backed securities to an even larger sum as the US splutters.

Europe on the other hand continues to trudge along. EUR/USD remains stubbornly high at $1.305, as German economic sentiment contracts and southern European countries start to reject austerity.

There is no doubt that this sentiment is rising; Italy, Germany, France and Spain are all seeing an astronomical rise in the protest vote against Europe’s current austerity plans. It will be interesting to see how the G-20 responds to this.

But the most interesting development heading into the meeting is the showdown between Japan the US.

USD/JPY and EUR/JPY have both appreciated over the Asian session as investors position themselves for the kinds of rhetoric they expect to see over the weekend. The US fired the first shot on Monday by ‘reminding Japan of it obligation not to interfere with its currency’. Interesting choice of words considering the expansion plan the Fed is currently undertaking. Today, that comment was countered by Governor Kuroda himself while boarding a plane to the G-20 meeting, stating: ‘the BoJ’s policy isn't targeting forex, (it’s) aimed at ending deflation’. Traders obviously believe the BoJ will hold firm, explaining the move in USD/JPY and EUR/JPY.

This has been the worst week for commodities and material plays alike since August 2012, as the bears have roared. This has led some to call the plunge in gold as the bubble bursting. However, several interesting reports emerged today showing that physical gold is experiencing its highest demand of the year, as the two largest consumers of gold in China and India ramp up demand. This saw the spot price having its strongest run in four weeks. Copper also had interesting supply and demand issues, with reports out of the US showing output from the likes of Rio Tinto is on the way down and that physical copper prices continue to soar on speculation that supply is easing.

This has seen the materials plays picking up the pieces today. BHP, which has lost over 21% of its global market capitalisation year to date, and 7% from its share price this week alone, finally found support in Australian trade. It has picked up 2% as CEO Andrew Mackenzie takes a knife to his board and other expenses. We are seeing signs of buy calls with BHP; whatever your view, BHP will survive any form of ‘global slowdown’. It has too many quality grade-one assets for it to fall into the abyss - the point where it will be a screaming buy no matter what the sentiment is not very far off.

The Nikkei was also stronger today driven again for the inverse correlation with the yen, and a growing sense of optimism from the Japanese investment community. The Hang Seng and the Shanghai composite were also stronger as Chinese consumer staples jumped up on comments from a Chinese government economist who believes growth will rebound later in the year. This all bodes well for Europe, coupled with the fact the S&P and Dow futures are pointing to a positive start.

European openings calls following suit: FTSE 6255 +12, DAX 7480 +7 CAC 3612 +12 and IBEX 7823 +11.

www.igmarkets.com

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