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IG - Morning Thought and Opening Calls


Good Morning

The S&P 500 rose 0.32% to 1490 points overnight with the magical 1500 points now well and truly in focus as insurance and commodity shares lead the way.
Travelers Cos is heading the gains, and is up 2.5% after its earnings topped the forecast. The insurance company saw a rise in revenue from the investment portfolio and increased sales. Comparing Travelers to local insurer QBE, which has a large US-exposed businesses arm, you can start to understand why the Australian market has been lagging behind, with QBE announcing a restructure in the same market. In other fourth-quarter earnings news, US chemical producer DuPont jumped 1.7% as it also topped estimates.

Looking to results that could possibly affect our market today, overnight Freeport-McMoran Copper & Gold Inc. which is the world’s largest traded copper stock surged 5.3% on the miner’s fourth-quarter earnings.

Watch for OZL, PNA and SFR to get a possible kick today on the result. If our market is going catch up to its American counterpart, the likes of BHP, RIO, WPL, and even to some extent FMG, it is going to have to be switched on. We continue to remain bullish on cyclical Aussie equities and for good reason: China has snapped a seven straight quarter GDP decline showing that it isn’t in for a hard-landing.

Japan is also looking to expand its economy for the first time in two decades (although not as soon as expected after yesterday’s BoJ meeting), and Europe has ‘passed the dark clouds by’ according to ECB president Mario Draghi overnight. So what we are now looking for is risk to be not just switched on but be locked on.

Since a low of 3985 back in June, the local market has risen 20% in seven months, but the push has been led by high-yielding income plays such as the Commonwealth Bank, Westpac, Wesfarmers, Telstra and Woolworths, which have all risen by approximately the same amount as the market. If the market is to head to 5200 points by the end of the year as some are suggesting, BHP and RIO are going to have to do some heavy lifting, coupled with investors unwinding some of their defensive yield-plays which are becoming over-crowded. We note that the last time the ASX 200 traded around the current level of 4780 points, BHP and RIO were sitting at $45 and $80 respectively. This suggests the current uptrend can continue (and quickly) if the equity market switches from the defence to attack.

Looking to local news and with the consumer price index out at 11:30 (AEDT), today all currency traders will have their eyes well and truly fixed on AUD/USD. Overnight the pair rose 0.44% to $1.056 with a lot of support at the 1.052 level as economist are expecting to see the RBA core measure to come in at 0.8% compared to the forecasted 0.4%. We now see this expectation as factored in and don’t anticipate the result to push the Aussie dollar past $1.059. AUD/USD is currently sitting at $1.0566.

BHP has just reported to the market in London, and as expected, most of the report was in-line with forecasts. The major highlight of the report was copper, with production up 5% on the half and 8% on the quarter at 295,000 tonnes compared to consensus of 286,000 tonnes. BHP’s Escondida mine in Chile was the major talking point, with production increasing by 70% and this is expected to rise an additional 20% by the close of the year. Copper is definitely the metal of choice right now, as US-housing starts take off, which will lead to increased demand for copper in the home.

To iron ore, the Pilbara did it again with a twelfth consecutive production and sales record. However, this was well forecasted and had been factored in for a while. The results are not expected to have a major effect on the share price. Iron ore came in at 42.19 million tonnes, up 3% on the half and 6% on the quarter.

Looking to petroleum and production, it was up 3%; output however was down 2%. Actuals were 59.9Mboe (million barrels of oil equivalent); this is compared to estimates of 60Mboe, which are again well and truly in-line. We note that 70% of BHP earnings comes from iron ore and petroleum, while copper has averaged about 20% of BHP’s earnings over the past ten years; traders who are bullish on copper may consider RIO as it has a more diversified copper portfolio With BHP’s result coming mainly in-line with expectations, we do not expect any major changes to what BHP’s ADR is today which is pointing to a 0.29% rise to $36.87.

Moving to the open and we are calling the ASX 200 up 0.21% to 4789 points. After a firm lead from the US due to its reporting season kicking into gear, we expect volumes to pick up today after two days of thin trading, and the BHP result to add weight to any market uptrend.

MarketPrice at 8:30am AESTChange Since Australian Market ClosePercentage Change
AUD/USD1.05680.0018 0.17%
ASX (cash)478910 0.21%
US DOW (cash)13749103 0.75%
US S&P (cash)1493.28.4 0.56%
UK FTSE (cash)621130 0.49%
German DAX (cash)7727-11 -0.15%
Japan 225 (cash)10655-33 -0.31%
Rio Tinto Plc (London)35.37-0.18 -0.50%
BHP Billiton Plc (London)20.81-0.00 -0.01%
BHP Billiton Ltd. ADR (US) (AUD)36.870.29 0.79%
US Light Crude Oil (March)96.630.54 0.56%
Gold (spot)1692.10-1.3 -0.08%
Aluminium (London)207025 1.21%
Copper (London)814029 0.35%
Nickel (London)17485-6 -0.03%
Zinc (London)233832 1.37%
Iron Ore145.10.0 0.00%

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

EVAN LUCAS
Market Strategist
www.igmarkets.com

ENDS

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