IG Markets - Morning Thoughts

IG Markets - Morning Thoughts

July 1 is here and the new financial year is upon us with what could be one of the more interesting financial years in recent memory.

The three main reasons for this are; US tapering talk, China’s slowing economy and the next federal election.

Starting with the US and last month was the first time in eight months the S&P recorded a negative finish (the ASX on the other hand has registered three of the last four months in the red) as Fed tapering talk puts the brakes on the world’s largest markets.

The fact that the S&P contracted in June is a concern for the regional markets. Australia, Singapore, Hong Kong and Malaysia all take leads from the US. Considering the US markets are experiencing their fourth plus year in a bull market a pull-back is coming and that could see these markets contracting with even though most have been going backwards for months.

Global bonds are also plunging as the Fed’s back stop on yields starts to fade. This move can also explain the rock solid bear market which gold is currently experiencing as a low yield environment is a gold bulls dream. However now that rug is being firmly tugged on by tapering talk that gold bears have the floor and are roaring loudly - making a call of US$1100 an ounce.

The next concern for this year is China. China is undoubtedly the life blood of Australia’s recent wealth, we have just registered 22nd consecutive year of growth on Friday and you would expect this to continue.

However, what is a little concerning for the local market are statements arising out of official media outlet Xinhua over the weekend, reporting official statements from China’s President Xi Jinping. They included: ‘officials shouldn’t be judged solely on boosting gross domestic product’ as well as this statement: ‘China won’t sacrifice the environment and social development to ensure short-term growth’. These comments are legitimising the slower growth situation currently being seen from official Chinese data.

President Xi also stated that China needs to grow at about 7% to double per capita gross domestic product by 2020 compared to the 2010 level further showing that China is readying itself for a slower pace of growth.

What this will mean domestically is wage growth and job security in the mining industry is going to be under pressure, and the current status quo is going to change as mining companies adjust to a slower China. By no means is it over, it will just be in a different phase. It should also give other sectors a chance to take the reins as the economic driver, with the most likely sector being energy as gas becomes the new black.

Finally the federal election is also key to the economic fate of Australia. Every election over the last decade or so has seen an upswing in consumer confidence (where it has been a Labor or Liberal government) except the last one. There is no doubt the hung parliament has caused anxiety in the general community. A majority government, whoever that may be, will be what the market and the general economy needs. It will provide calm not seen for three and a half years and the ability to govern in its own right. So whenever the election is held a majority government is what the market will be rooting for.

Moving to the open, we are calling the ASX 200 down 10 points to 4793 (-0.20%) as we pick up from the slight losses seen in the US on Friday night. BHP’s ADR is suggesting the stock could consolidate at its current price of $31.37 however volumes are low in the deposit receipts. It will also react to China’s PMI data today, which would mostly have downside risk built into it considering the comments out of China over the weekend.

FY2014 will be interesting for all the right reasons - even though they can be seen as a negative.

IG 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 if you require market commentary or the latest dealing price.

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