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IG Markets - Morning Thoughts

IG Markets - Morning Thoughts

The Australian stock market looks set to open in a mildly positive fashion with BHP taking centre stage. At this stage we are calling the index up a mere four points at 4524, however it would certainly be nice to see a close above Monday’s high of 4538, thus creating a higher high and keeping the recent uptrend intact.

Whether this can materialise will probably hinge on three things. Firstly, the banks will need to keep attracting buyers, and with there being no major negative catalyst for the sector today, there seems to be no reason to expect major downside, with yield buyers potentially providing support. Secondly China will need to continue its positive price action and prove to local traders that yesterday’s 2.8% rally in the Shanghai Composite and A-shares were more than a technical one-day bounce. Clearly it was positive to see speculation that the authorities are looking at continued urbanisation and tax measures that could not just support GDP, but see China target quality growth above 7.5%. Allowing local insurers to invest more freely in their banks is also positive for the space as it will aid corporate profitability, a key reason why the A-shares have been continuously de-rated over the last three years. Hopefully the gains will continue in both these beaten-up bourses today when they open at 12:30 (AEDT), which in turn could support the ASX 200, and most probably the AUD as well. Thirdly, BHP looks set to have a lively start with its ADR suggesting an open at A$34.68, up 1.1%. Throughout October and November the miner tested, but could not close above A$35.00, so a finish above the October 19 high of A$35.04, although unlikely would be very positive for the stock and subsequently the market.

The US lead hasn’t really provided too much of a spark, despite seeing good buying below 1400 with the S&P 500 closing at 1409, up 0.2%. Apple subtracted a number of points out of the index; however it was positive to see strong buyers of dips, as once again sentiment towards the budget talks drove price action. We are looking closely at 1424 (the 61.8% retracement of the September to November sell-off and Monday’s high) where a closing break in the short-term should be taken positively and suggest further upside. Fiscal talks continued, as they will do up until December 21, but again there are distant signs that both parties should come to at least a short-term agreement. Certainly the market is seeing it that way and giving the situation the benefit of the doubt. US data on the whole was positive with November services ISM showing good expansion, notably in the new orders sub-component.

Despite the three previously mentioned elements which we feel will drive trade today, the November employment numbers released at 11:30 (AEDT) should also be either a source of concern or inspiration. Consensus is that no jobs will be created (net), while the unemployment rate is expected to tick up to 5.5% on an unchanged participation rate of 65.1%. While this metric is extremely hard to predict, or at least that’s how it seems given the wild misses to consensus in the past, employment is a massive piece of the monetary puzzle that the RBA does look at. If rates are potentially coming down to 2.5% next year (as per a number of economists’ estimates), consumers clearly need jobs if they are going to part with their cash and pick up the slack left by the fall in mining investment. So, todays’ print is not just about the actual rate, but as always the quality of jobs lost or created (i.e. the mix of part-time or full-time). Expect decent sellers of AUD/USD on any moves up to 1.05, although 1.0485 has been a ceiling over the last couple of days.

On the commodity front, iron ore continues to stabilise, while gold traded to a session low of $1684. We are cautious on gold given the poor price action of late and focus on support between $1662 (the 200-day moving average) and $1672 (the November 5 low and 50% retracement of the June/October rally). Goldman Sachs caused a bit of a stir overnight by suggesting the gold cycle is likely to turn in 2013, given its view of a US recovery, which will offset continued balance sheet expansion. We’d agree to an extent, and towards the latter stages of 2013 if we do see a US recovery, with growth pushing closer to Fed member Charles Evans optimistic target of 3%, the USD could also lose its ‘funding’ and ‘safe-haven’ status and adopt a more investment-focused status that it had pre-GFC.

The ECB decision is likely going to be the other big event risk in upcoming European trade. Five out 61 economists are calling for 25 basis points to be cut of its refinancing rate, which would clearly weaken the EUR, however we feel the likelihood is low. The bank could however lower its outlook for both inflation and growth, which could see traders’ expectations of a cut in early 2013 increase.

Market Price at 8:00am AEST Change Since Australian Market Close Percentage Change
AUD/USD 1.0457 -0.0020 -0.19%
ASX (cash) 4524 4 0.08%
US DOW (cash) 13026 47 0.36%
US S&P (cash) 1412.4 -2.6 -0.18%
UK FTSE (cash) 5901 10 0.17%
German DAX (cash) 7476 -11 -0.14%
Japan 225 (cash) 9516 47 0.50%
Rio Tinto Plc (London) 32.26 0.95 3.02%
BHP Billiton Plc (London) 19.98 0.46 2.37%
BHP Billiton Ltd. ADR (US) (AUD) 34.68 0.39 1.12%
US Light Crude Oil (January) 87.85 -1.00 -1.12%
Gold (spot) 1693.50 -8.5 -0.50%
Aluminium (London) 2105.00 11 0.53%
Copper (London) 8075.25 44 0.55%
Nickel (London) 17549.00 45 0.26%
Zinc (London) 2239.88 4 0.17%
Iron Ore 117.9 0.80 0.68%


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