IG Markets - Morning Thoughts

IG Markets - Morning Thoughts

Bernanke’s big breath

They say practice makes perfect, and there is no doubt that Federal Reserve chairman Ben Bernanke has now managed to strike an also most perfect accord between the hawks and the doves after a slight ‘sneeze’ at the May testimony.

His language has managed to completely separate QE monetary stimulus tapering and the cash rate, as well as clarifying that bond purchases are ‘by no means in a pre-set course’.

It was a complete reiteration of his speech last week with even more cues that tapering is conditional on data, and not just employment data either; growth, inflation and financial conditions are just as important and they will not taper unless the data gives them confidence to do so. In short, we are in control and will move in whatever direction we see fit. You could hear the market taking a big deep breath on this news.

The currency markets loved the comments and saw the yen sliding versus all major pairs, while the EUR and the AUD pushed higher against the USD as the romance in risk assets returns and continues to strengthen even in the face of China concerns.
It must be said, ‘China concerns’ seem slightly over hyped. The GDP results and industrial productions numbers of late are in line with Premier Li Keqiang’s expectation. The short term pain which the newly installed government is creating is deliberate; it is wringing out speculative lending and cracking down on fraudulent invoices and deal flows. On a longer term view this is a stringent move, as the country moves out of mass industrialisation and into the next stage of development.

Moving back to the overnight market and bottom-up views were back in focus following Mr Bernanke’s testimony. The likes of Intel, IBM, Yahoo, Bank of America and New York Mellon all reported. The results were solid, with IBM (which makes up 9.5% of the DOW) coming in well ahead of expectation and gave the indices a helping hand. The S&P snapped back, with BoA jumping 1.9% on the theme of the season – better than expected trading revenues – as seen in the results from Citigroup and Goldman Sachs which both saw stellar results in this division.

Tonight sees the release of Baxter’s earnings - for those of you that are CSL watchers, these results will be a key driver of expectations for CSL. We have seen concerns over the last few months with Stage III testing in some of Baxter’s immunoglobulin (IG) projects. This has rocked the boat for CSL and for some suggesting that Baxter’s IG projects will not reach commercialisation. If this is the case, there could be short term issue for CSL.

Production week continues to be a bright spot for the local market; yesterday saw BHP pulling out record production numbers for its iron ore division, however fell short in petroleum which was down 2%, and today we would expect that slight disappointment to continue for WPL considering the pre-warning it gave to the market two weeks ago. The technical glitch at Pluto sees expectations for production at 85-89 million barrels of oil equivalent (Mmboe), in from 88-94 Mmboe back in October. What will be interesting in earning season from a WPL point of view will be cash on balance sheet since they halted the Browse project back in March.
Moving to the open, we are now calling the ASX 200 up 22 points to 5004 (+0.45%) as the ASX follows Europe and the US markets higher. With earning seasons in the US hitting full stride this week, US leads will continue to drive global markets, and because Mr Bernanke’s testimony to the Senate tonight will be a tape recording of last night’s speech, earnings season will be more important.

Iron ore continues to shoot higher; finding itself back into the $130 handle. After yesterday’s production report, BHP looks set to punch higher with its deposit receipts, suggesting the stock should add another 17 cents today to $34.36 - this would mean BHP has added 11.32% since the June low. The cyclical stocks are the ones to watch and energy is now centre stage.

Market Price at 6:00am AEST Change Since Australian Market Close Percentage Change
AUD/USD 0.9234 0.0013 0.15%
USD/JPY 99.5950 0.2550 0.26%
ASX (cash) 5004 22 0.45%
US DOW (cash) 15490 41 0.26%
US S&P (cash) 1679.7 4.6 0.28%
UK FTSE (cash) 6571 5 0.07%
German DAX (cash) 8261 51 0.62%
Japan 225 (cash) 14645 30 0.20%
Rio Tinto Plc (London) 29.26 0.43 1.47%
BHP Billiton Plc (London) 18.45 0.13 0.71%
BHP Billiton Ltd. ADR (US) (AUD) 34.36 0.17 0.49%
US Light Crude Oil (June) 106.55 1.08 1.02%
Gold (spot) 1275.21 -13.5 -1.05%
Aluminium (London) 1805 -5 -0.25%
Copper (London) 6899 -44 -0.64%
Nickel (London) 13960 228 1.66%
Zinc (London) 1861 -19 -1.03%
Iron Ore 130.40 1.4 1.10%

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.

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