IG Markets - Morning Thoughts

IG Markets - Morning Thoughts

Today sees some of the biggest data drops in a quarter.

Australia will see the much-anticipated capital expenditures numbers at 11:30am AEST. This print is coupled with Australian building approvals, an area that has been experiencing softness in recent months. However, it will be the first major print post the last interest rate cut that might see some upsides. In the US, preliminary GDP and unemployment claims will be released tonight followed by core personal consumption expenditure tomorrow night.

All of this data is eagerly watched by central banks. The Australian capex numbers are a favourite of Governor Stevens and will be a lead indicator for the possibility of another rate cut. The prediction is for 0.7% growth after having dropped 1.2% the quarter before. A poor number here will see rate cut optimism spike.

In the US, the employment data is the one everyone is talking about as it is the key driver of the Fed’s stimulus package. However, it isn’t the only piece the FOMC is watching. Personal consumption is a core barometer of the strength of the economy. If consumption is still lagging confidence, then stimulus will remain, as the economy is still not standing on its own two feet.

This brings us to last night’s trade. There is a huge amount of chatter that the fall in the equity markets was due to tampering fears. We cannot see the reasoning behind this conclusion. Overnight, US bond yields slid back massively. Ten-year yields started at 2.16% before closing at 2.11% - that’s a rather large one-day slide and suggests profit-taking occurred and a belief that stimulus is here to stay. The USD slid against most major pairs, particularly the CHF and EUR, and once more another FOMC member in Boston, President Eric Rosengren, reiterated the dovish calls which actually saw market rallying post his speech.

This all suggests that investors were not concerned by the Fed last night. To us it looks more like profit-taking on the equity side. We know what has been happening in the Australian market with US investment firm BlackRock repositioning itself out of the banks. A similar move in the US markets would be prudent considering the strength seen in the Dow and S&P.

What will affect the ASX today is that commodities were hit pretty hard last night; this was not due to US concerns however, it was because of China growth fears. Iron ore was smashed, sliding 4.3% to US$112.90, as the IMF downgraded China’s growth expectations. The IMF is expecting 7.75% growth this year and is downgrading their original call of 8% this year and 8.2% next year. This will put pressure the Goldman Sachs’ rotation call from yesterday.

Ahead of the open, we are calling the ASX 200 down 25 points to 4950 (-0.49%). 8.9 points is due to the fact NAB turns ex-dividend today and will shed 93 cents. One stock to watch closely is Alumina. Overnight, Moody’s downgraded its big brother in Alcoa to below investment grade (aka junk status) as the aluminium price is not supporting the credit-worthiness of the company. Aluminium has shed 47% in the last three years and Alcoa now has a credit rating of Ba1 from Baa3. Bond investors like Vanguard et. al. will have to shed their holding in Alcoa’s debt offerings as their charters govern.

BHP’s ADR is suggesting the security will shed 55 cents to $34.32 (-1.57%) as the IMF China calls bite. However, after yesterday’s rally this call is only half of the gains made. If BHP can retain most of the recent gains, it will add to calls of rotations out of defensives and into cyclicals.

Market Price at 6:00am AEST Change Since Australian Market Close Percentage Change
AUD/USD 0.9638 0.0094 0.98%
USD/JPY 101.1250 -1.0500 -1.03%
ASX (cash) 4950 -25 -0.49%
US DOW (cash) 15297 -67 -0.44%
US S&P (cash) 1650.7 -4.6 -0.28%
UK FTSE (cash) 6645 -84 -1.25%
German DAX (cash) 8359 -83 -0.98%
Japan 225 (cash) 13973 -354 -2.47%
Rio Tinto Plc (London) 28.61 -0.20 -0.68%
BHP Billiton Plc (London) 19.30 -0.09 -0.45%
BHP Billiton Ltd. ADR (US) (AUD) 34.32 -0.55 -1.57%
US Light Crude Oil (June) 92.89 -1.92 -2.02%
Gold (spot) 1392.85 9.5 0.68%
Aluminium (London) 1866 11 0.58%
Copper (London) 7288 5 0.07%
Nickel (London) 14821 -7 -0.05%
Zinc (London) 1886 20 1.09%
Iron Ore 112.9 -4.9 -4.16%

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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