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IG Markets - Afternoon Thoughts

IG Markets - Afternoon Thoughts

FTSE 6355 +8
DAX 7836 +3
CAC 3777 +3
IBEX 8240 +10
DOW 13994 -16
NAS 2758 -6
S&P 1511 -2

Oil 97.59
Gold 1671

Asian markets have mostly tracked US markets higher and gotten off to a solid start to the week. Risk assets continued to march higher on Friday despite a disappointing non-farm payrolls print (157,000 versus 161,000 expected). The unemployment rate also missed consensus at 7.9% versus 7.8%. The ISM manufacturing PMI came in well ahead of forecasts at 53.1 (versus 50.7 expected). There were also some comments by Fed member James Bullard stating that a jobless rate in the low 7% region may see the Fed end QE, which lifted risk. Some encouraging earnings reports from the likes of Caterpillar also helped keep risk sentiment positive. The forex space has been relatively subdued in Asian trade as market participants search for fresh leads to drive sentiment. After the big moves seen in some of the major fx pairs on Friday, it is not too surprising to see some of them take a breather ahead of what will be a key week on the central bank front. The RBA will open proceedings tomorrow followed by the BOE and ECB on Thursday. All of them are expected to remain on hold. We have already seen some volatility in the Aussie dollar today as local data releases continue to fall short of expectations. Building approvals data released this morning showed a 4.4% drop versus consensus for a 1.1% rise. ANZ job ads also showed that the jobs market remains fragile with yet another contraction. The immediate impact was a sell-off in AUD/USD, which dropped to a low of 1.04 where it managed to find support. We are likely to continue seeing the pair consolidate around the 1.04 level ahead of the RBA’s rate decision and statement. It is hard to make a call which way the RBA’s statement will swing. Consensus is for no change in rates at 3% but the statement is likely to be the focal point. This will definitely be a very tricky meeting for the RBA as global macro conditions seem to be improving but local economic data remains fragile.

Looking at the equities in the region, the Nikkei, Hang Seng and Shanghai Composite are all around half a per cent firmer. USD/JPY burst through 92 on Friday and went on to print a high of 92.96. Although the pair has retreated mildly today, this move has really fed through to the Nikkei today, which is now looking to establish its footprint above 11,000. EUR/USD has retreated from 1.37 but is likely to find support as it dips into the short term moving averages near 1.36. The single currency could be in for more volatility later today with the Spanish unemployment rate and European PPI on the calendar. Ahead of the European open, we are calling the major bourses moderately firmer. In the UK we have construction PMI data to look out for, which is expected to show an improvement to 49.7 (from 48.7). This data might help GBP/USD recover from the 1.57 level after having been violently sold off on Friday. However, should the data miss, we could see cable extend its loss. US markets are likely to retreat slightly from Friday’s close with factory orders in focus.

After surging 0.67% in the first twenty minutes of trade, the market found strong resistance at 4950 points, suggesting it is going to have to provide positive new data to break through this point. BHP has turned negative after having held up for most of the session, while RIO (+0.9%) has held on to some of its gains. With investors looking for the ‘risk-switch,’ financial names have started to wane, with CBA (-0.6%) and WBC (-1.3%) pulling back in early trade after rallying 4.1% and 8.1% respectively for the year. With 4950 looking like a near-term resistance point, the psychologically important 5,000 level may be a few more weeks off. We do still expect the market to have a stellar 2013, however, it will have to ignore local factors and continue to look at company fundamentals and improving global leads to punch higher. Tomorrow we have Cochlear, Navitas and Transurban Group reporting along with a Macquarie Group business update.


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