IG Markets - Morning Thoughts

IG Markets - Morning Thoughts

Is it finally here? Is the winter rally finally on the cards? Is US macro data actually trickling down into corporate earnings? The markets seem to think so.

At the start of winter we asked ourselves the question - would we be having a winter wonderland or a winter spent north of the wall?

So far the latter is and has been firmly fixed in place. However, at the close of trade yesterday the market was only 45 points from where it began on June 3 and has now rallied 249 points from the lowest point of the year on June 25.

What is fuelling the optimism is the confession session of the last six weeks, both here and abroad, which has seen massive earnings downgrades. In the US, analysts have lowered their profit growth forecasts to 1.8% from 8.3% at the start of the year for this quarter.

We know from the data dumps out of the US over the last three months that earnings are not going to be the low. Building approval rates, consumer confidence and continued employment increases will have upside risk for US earnings and will flow through to the markets.

Here in Australia, upside risk is certainly expected rather than a surprise. Downgrade after downgrade has had a clearing the decks effect for most corporates in Australia. The fact that macro noise has distracted investors from the bottom-up views of the market is also why upside risk to stock price is now a real possibility.

Commodities such as oil and natural gas will have upside potential for corporates exposed to these products, while those exposed to iron ore are also going to be keenly watched – especially considering the shipping logs out of Port Headland over the last three months, and the average price of iron ore is currently $136.02 year-to-date. Those that have maintained production levels, such as BHP and FMG, are in for upside potential.

This should see the current rally continuing; we understand volumes of the last ten days have been below average, but the fact that the market is rallying in the face of gloomy domestic data and China concerns suggests the market is doing what it does best – forward thinking.

Historically, full year results do tend to come in on the upside and the fact macro gloom has drowned out most bottom-up views, early positioning is finally outweighing current macro fears. This should see the ASX hitting its straps and finishing winter on a high.

Moving to the open, we are calling the ASX 200 up 13 points to 4895 (+0.26%), as the market again follows Europe and the US. All of the past seven trading sessions have seen the market move through 1.3% (plus or minus). Of the last 12, ten have moved through this range, with volumes still light the possibility of this happening again today is high.

BHP saw its London listing follow the trading moves of the ASX listing to be up 2.75%. Its ADR is also supporting the current rally in BHP with the deposit receipts suggesting the stock should add another 36 cents today to $31.97. As illustrated above, iron is averaging US$136 a tonne, spot rates are also climbing with iron ore popping up to $123.70 which will also support the current price action.

Market Price at 6:00am AEST Change Since Australian Market Close Percentage Change
AUD/USD 0.9178 0.0033 0.36%
USD/JPY 101.0850 -0.1900 -0.19%
ASX (cash) 4895 13 0.26%
US DOW (cash) 15286 1 0.01%
US S&P (cash) 1649.4 3.1 0.19%
UK FTSE (cash) 6524 35 0.53%
German DAX (cash) 8071 46 0.57%
Japan 225 (cash) 14400 -73 -0.50%
Rio Tinto Plc (London) 27.53 0.84 3.13%
BHP Billiton Plc (London) 17.36 0.47 2.75%
BHP Billiton Ltd. ADR (US) (AUD) 31.97 0.36 1.15%
US Light Crude Oil (June) 104.17 0.84 0.81%
Gold (spot) 1250.50 -7.2 -0.57%
Aluminium (London) 1794 -13 -0.71%
Copper (London) 6754 -102 -1.49%
Nickel (London) 13415 -79 -0.58%
Zinc (London) 1869 -9 -0.48%
Iron Ore 123.70 1.8 1.50%

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.

www.igmarkets.com

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