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IG's Morning Trading Wrap

IG's Morning Trading Wrap

The ECB stole the show overnight. While many had speculated the bank may lower its growth and inflation projections, the fact that EUR/USD was trading at 1.3081 prior to Mario Draghi’s press conference suggests they weren’t acting on their instincts. With the ECB significantly lowering growth expectations to -0.3% in 2013 from +0.5% (using the mid-point) and inflation now expected to be around 1.6% in 2013 and 1.4% in 2014, this is certainly below the bank’s target of ‘close to, but less than 2%’. Recall in October Mario Draghi when questioned about a potential rate cut definitively answered ‘no’, and now in this overnight conference he calmly suggested the bank always discusses all instruments of monetary policy. The stage has been set for the ECB to lower its refinancing rate at some stage next year.

Perhaps the key for us though was admission of a discussion of imposing negative deposit rates. Certainly there are wide ranging implications of this action (as Japan found out a number of years ago), predominantly as it undermines bank funding via money markets. However, as institutions move money away from the ECB’s balance sheet, that money will either flow into sovereign debt, the real economy or perhaps offshore, in which case the idea of significant outflows from the eurozone will weaken the EUR. EUR/USD collapsed to 1.2951, just above key support at 1.2949 (the 38.2% retracement of the November to December rally), so this may offer an attractive entry point for EUR bulls. However, a break of this support should suggest a deeper correction, although perhaps the easier way to play the EUR is via the cross, with many traders now looking at selling EUR/NZD and EUR/AUD on rallies. We will watch for a new trend to develop here over time.

Away from the ECB, European markets look very healthy indeed, notably the CAC and DAX which are both trading at the year’s highs and look like they want to keep rallying despite the ECB’s lower growth forecast. The interesting dynamic is these gains come at the same time as German two-year bunds experience negative yields (now -4bp), while France got a six, seven and 15-year bond auction away last night at record low yields. Perhaps the buying was aided by another sizeable move out of Italian debt and into bunds driven on news that Silvio Berlusconi has withdrawn his support for the Monti coalition.

US markets seemed unnerved by the strong downside moves in EUR/USD, with the S&P 500 closing at 1413 +0.3%. This should put a mild bid in our local market today, which should open around 4521 +11. Interestingly, Walter Energy rallied 5.3% in the US, so it seems certain that US investors see a bid from BHP or even Glencore potentially materialising. We feel selling rallies in this name makes sense as it seems relatively illogical for BHP to be making a tilt into this beaten-up coal name at present. BHP looks set to open at $34.66 +0.7% based on its ADR. Iron ore prices gained a touch at $118.4 per tonne, which helps names like AGO, GBG and FMG.

Price action at a headline level is tough to predict given the lack of definitive leads, however we would not be surprised if the bears sold into the unwind, only to see the index find buyers if we move below 4510. On the data side we get a read on the Australia October trade balance, which is expected to widen to A$2.2 billion, although this could have greater ramifications for the AUD than the equity market. The last hour of trade could be interesting as traders potentially position themselves for tonight’s US payrolls report. Given the impact of ‘Sandy’, the market will give the print an element of leeway, although many feel the incident subtracted around 50,000 jobs from being created. Consensus is currently calling for 86,000 jobs to be created, around half the twelve-month average of 160,000, so even if you add the 50,000 that was potentially lost from ‘Sandy’, it is still below trend. The low-ball call this time around comes from Morgan Stanley (15,000) so if its call comes to fruition expect risk asset to come under pressure despite the metric not having as much significance as previous reads.

Next week’s FOMC meeting and Japan elections look set to keep traders on their toes next week, and both could have positive ramifications for risk assets, albeit tempered by high expectations of these events already in the market. If polls in the Japanese newspaper ‘Nikkei ‘ released yesterday are correct and the LDP and Mr Abe get over half the 480 seats in the lower house elections then that would be positive. However, if they can claim 320 seats then BOJ law can be amended even with the ruling DPJ party controlling the upper house. This in theory could see the smooth implication of much more radical easing by the BoJ in 2013.

MarketPrice at 8:00am AESTChange Since Australian Market ClosePercentage Change
AUD/USD1.04810.0020 0.19%
ASX (cash)452112 0.27%
US DOW (cash)1306462 0.48%
US S&P (cash)1416.37.8 0.55%
UK FTSE (cash)591221 0.35%
German DAX (cash)755086 1.15%
Japan 225 (cash)95337 0.07%
Rio Tinto Plc (London)32.370.11 0.33%
BHP Billiton Plc (London)20.140.16 0.78%
BHP Billiton Ltd. ADR (US) (AUD)34.660.25 0.73%
US Light Crude Oil (January)86.39-1.33 -1.52%
Gold (spot)1698.007.7 0.45%
Aluminium (London)2083.50-17-0.79%
Copper (London)7996.13-57-0.70%
Nickel (London)17182.00-303-1.73%
Zinc (London)2213.75-18-0.82%
Iron Ore118.40.500.42%

Chief Market Strategist


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