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IG Markets - Afternoon Thoughts

IG Markets - Afternoon Thoughts

The S&P 500 is knocking on the 1500 door and solid earnings from Google and IBM have kept futures elevated through Asian trade. Apple and McDonalds have hogged the limelight today with the market expecting the former to achieve Q1 EPS of $13.52, Q1 revenue of $54.83 billion and gross margins of 38.6%. Apple is at a pivotal juncture, and the market, after pushing the stock down 18% since the Q4 results, is looking for evidence of a trough in earnings and the confidence needed to see a change in fortunes. Those who have been buying ahead of earnings should be appeased that history is on their side and the tech giant has beaten top-line expectations in six out of the last eight quarters.

Asia has once again dragged on European calls, although we haven’t really seen an overwhelming response from clients to short indices today. Japan is once again the standout as traders continue to sense that the rise in USD/JPY has hit a ceiling and inflows back into the JPY (at least in the short term) are a distinct possibility. The half-hearted response by the BoJ looked at first blush to have done enough, but it seems the market now feels the actions are no way urgent enough to rise up to the task at hand. Clearly, with the conservative-natured Mr Shirakawa at the helm, the aggressive policies that are sought by Shinzo Abe and needed to even dream of achieving 2% inflation are not going to materialise. With Mr Shirakawa stepping down in early April, a rally into the change of leadership in USD/JPY and the JPY crosses should unfold given the candidates pencilled in are keen promoters of Abe’s more radical measures. The market is watching government and central bank rhetoric on Japan’s contribution towards an all-out currency war; this will be when the war of words really heats up.

Australia has once again held a firm line despite its tendency to follow its second biggest trading partner in Japan. A below-consensus Q4 CPI (trimmed mean running at 2.4% year-on-year) has kept the interest rate cut hopefuls happy, although we would not read into this too much. At the most this removes inflation as a hurdle to cut rates further, but a lot now falls on domestic data, like employment, to give the bank the ammunition needed. The modest falls in AUD/USD to 1.0527 suggests the market agrees with us. BHP has also shown that Australia’s biggest company is tracking as expected and executing as planned. The numbers today pleased the market and while most divisions threw up few surprises relative to expectations, there were some positive themes if you drill down. The copper division looks interesting , and while the metal makes up around 15% of net asset value, it has made a real effort to highlight the growth in this space. Given the metals fundamentals (with positive supply/demand balance and a growing US housing market), growth here should appease investors.

European markets look set to open on the front foot with the FTSE likely making a new higher high and continuing the uptrend. While many are bearish on the prospects for sterling, especially given the potential for the BOE to link monetary policy to a GDP target under the upcoming Carney leadership, sterling’s loss is potentially the UK market’s gain. We feel that after underperforming in 2012, this index may see better days on a relative basis. Today’s employment data and BOE meeting minutes could hold some future clues on policy ahead of the GDP report, which, according to Mervyn King will be much weaker than Q3. Eurozone consumer confidence will also be in focus and for currency traders the Bank of Canada meeting could throw up some volatility. Expect inflation forecasts to be cut, although we would look more closely at its tightening language. The IMF will also release updates to its world economic outlook.


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