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IG Markets - Afternoon Thoughts

IG Markets - Afternoon Thoughts

FTSE 6307 +13
DAX 7841 +8
CAC 3790 +9
IBEX 8684 +11
DOW 13899 +17
NAS 2743 +1
S&P 1502 +2

Oil 96.62
Gold 1659

Asian markets are mixed after a relatively flat session in the US. Risk sentiment remained relatively unchanged as markets took a breather following the recent run. However, there were some positives to take out of the US session, with durable goods orders (+4.6% versus 2%) coming in well ahead of expectations. Pending home sales data disappointed, but this wasn’t enough to derail risk assets which remain very resilient. Global growth bellwether Caterpillar gained ground after predicting better growth in the second half and this also helped underpin risk. There haven’t been any significant fresh drivers in Asian trade to sway sentiment significantly in either direction. EUR/USD has been sidelined at 1.345 through Asia, and USD/JPY has been consolidating just under 91. AUD/USD has finally recovered from 1.04 after having struggled recently. The pair has recovered to 1.045 on the back of NAB business confidence data which showed strong signs of improvement. Despite the recovery, the overall trend in the near term appears to be bearish. As a result, the best strategy might be to consider selling AUD/USD on a recovery into the 1.047 to 1.05 range. There are some pretty mixed moves in the equities space with the ASX 200 (+1.1%) and Nikkei (+0.7%) firmer, but Chinese markets are lagging. The ASX 200 is playing catch-up after having been closed yesterday, while the Nikkei is getting support from a weaker yen. Markets in China had a monster rally yesterday, so it’s not too surprising to see them cooling today.

The current environment leaves many market participants sceptical about selling risk. Equities around the world have had fairly long winning streaks now and surely are edging towards a near-term correction. We are also seeing a breakdown in correlations, particularly in the risk space, which could suggest we are getting back to a more normal playing field which stock pickers love. However, being so early in the year, it is still quite difficult to gauge whether this change is here to stay. Ahead of the European open, we are calling the major bourses modestly higher. On the economic front, we have German import prices and consumer climate data. US markets are pointing to a relatively flat start with earnings once again being the main focal point. We also have the Conference Board’s consumer confidence reading to look out for. The consolidation we saw in US markets is likely to continue until the Fed meeting on Wednesday.

The ASX 200 has jumped 1.1% on strong leads from healthcare, consumer staples and financial names. The healthcare sector was up 2.09% on the back of CSL rising 2.83% on low volumes and minimal news. At the risk of sounding like a broken record, defensive names are again trumping risk assets. CBA smashed its all-time high today, opening up at $64.15 and has since pushed higher, trading at $64.27 (up 1.08%). Westpac is the pick of the banks, advancing 2.8% to $28.33 and is now at its strongest level since April 2010. The uptrend in defensive stocks again can be correlated to the sell-off in bonds. With further interest rate cuts ‘expected’ (which is still unlikely to happen next week), investors are scrambling to shore up income. Telstra has put on 1.8% and is accelerating since finally breaking through the $4.50 barrier last week. With TLS confirming a $0.28 (6% net yield) fully-franked dividend until 2014, yield-hunters will continue to pile in. However, with defensive stocks looking more and more bloated, and with the end of the month fast approaching, fund managers may see value in reweighing portfolios from equities to other instruments due to their stellar performance over the month. Of major note for the week ahead is that Wesfarmers and Woolworths are reporting on Wednesday and Thursday respectively.


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