IG - Morning Thought and Opening Calls

IG - Morning Thought and Opening Calls

Thursday and Friday’s Australian trading sessions last week saw the worst week on the ASX for 52 weeks, with a drop of 3.81%.
The most interesting part of last week’s reversal was the stocks that were sold off.

Defensives were massacred last week, which is something that hasn’t been seen since 2011. ANZ dropped 8.3%, while Westpac shed 6.8% as international investors picked up their passports and cashed out with a smile as their Australian investment holiday comes to an end.

The yield trade is starting to come under pressure with the slide in the Australia dollar. If the dollar does fall back to 90 cents as is appears to be, international clients will start to lose out on the differentials. The profits in the banks are particularly glaring, and repatriation is key for international investors. Losing out in the currency pairs would see the shine in the trade tarnished.

The other trade that is starting to sap funds out of Australian banks is the US ten-year bonds, which are looking very attractive. With rates over 2% and risk at zero, the top-heavy banks are incredibly venerable to sell-offs.

The question we are asking is; collectively, are Australian banks now worth $400 billion dollars? This leads us to the fact that CBA, on every metric, is the most expensive bank in the world (even with the slight correction last week). With EBIT and NPAT guidance in low to middle digit levels we are asking, is it worth it?

These questions are no more pertinent than with NAB this week.

NAB is in cum-dividend, for an ex-dividend date of May 30 (Thursday). Under normal circumstances, you would expect a strong rally into the dividend before being sold off either just before the dividend if the run up is strong enough, or on the day as investors cash in on both growth and the 93 cents on offer.

We would expect this to continue, and with NAB having lost 5.3% last week, it now offers the most attractive yield story of all the big four, with a grossed-up yield of 8.34%. However, will we see international investors cashing out further as the AUD falls, or will we see local investors jumping back into the yield trade? This makes NAB a good one to watch this week.      

Ahead of the open, we are calling the ASX 200 down ten points to 4973 (+0.2%). Once more the defensive stocks look like they could be under more pressure, with AUD/USD continuing to slide. TLS is the biggest concern, with its low-digit growth guidance, and with yields now touching 5.7% (its major support feature) fully-valued investors may cash out here.

BHP’s ADR is suggesting the security will be up today, up 0.6% to $34.58 (22 cents). Iron ore remains at the year-to-date low of US$123.20 a tonne, but the slight change in optimism towards BHP could be the rotation out of fully-valued defensives and into growth stocks. The caution sign though is yield support isn’t there with the big miners, and even if global growth does kick off, we don’t expect a run to the resource sector in the interim of a global change.

It will be a very quiet start to the week for macro data as well, with the US and the UK on holiday tonight. This means no major leads will hit the global market newswires until Wednesday morning.
Thursday will see the release of the capex numbers; we will review these in more detail heading into the print, however a good number here could end the rate cut cycle in its tracks.

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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