ASX 200 set to fall as the market pullback arrives

ASX 200 set to fall as the market pullback arrives from Europe

The S&P 500 pulled back below 1500 points at the open of US trade and has been sliding ever since as European fears flared up. Heading into the close the S&P 500 was down 0.91% to 1498 points. Oil plummeted dropping $1.60 to $96.17 per barrel (its biggest drop since early December) as European political worries hit the market.

The futures market foreshadowed the drop, falling 1.6% early on as a reported in El Pais stated that Spanish Premier Mariano Rajoy (or members of his party) may have received illegal payments. This sparked calls from opposition parties for him to resign and increased tensions in the already fragile political scene. The Spanish issue was heightened further by the release of an official report showing that Spain’s unemployment rate has reached an all-time high, with 26% (4.98 million) of the population registering for benefits (although the figure was forecasted to be higher). EUR/USD fell 0.94% on this news after reaching $1.366 as ‘euro-fears’ took over once again and highlighted what European leaders have been saying for the last few months - that they are not completely out of the woods.

’Euro-fears’ were heightened further with news that former Italian Prime Minister Silvo Berlusconi has narrowed the gap to front runner Pier Luigi Bersani on promises of refunding taxes installed by Mario Monit’s technocratic government. These taxes were used to plug shortfalls in the public accounts left by Berlusconi when he was ousted from office. The biggest concern here is that even if Berlusconi loses, a Berani minority government would be formed and governing would be hampered. This all lead to large falls in Europe overnight with London (-1.6%), Frankfurt (-2.49%) and Paris (-3.0%) all seeing red.

Safe-haven assets turned back on, as the bond market saw the first real sign of buying. Overnight, US 10-year bonds found buyers at the 2.0% level, pushing yields lower. After reaching 10-month highs, buyers used renewed fear in Europe and scepticism of an improved US economy as reasons to buy in. We also note, however, that on the other side of the trade here is the US Federal Reserve, which has reaffirmed its commitment to buying $85 billion of treasure and mortgage back securities every month.

Turning to local news and all eyes are on the RBA and Australia’s trade balance today. Although it has been well publicised that official interest rate are unlikely to move, language will be the key. As we stated yesterday Governor Glenn Stevens is one of the best poker players around and will hold his cards very close to his chest; it is likely his reasoning for holding rates will point to easing in the financial markets both locally and internationally, as well as improved signs from mining. However, dovish views of the local economy are likely and may give signs to a possible cut in March.
Moving to the open, we are calling the ASX 200 down 0.79% to 4869 as the market finally takes a breather. We are expecting to see BHP following its London counterpart down this morning, with its ADR pointing to a 1% drop to $37.37. The pullback we will see today is needed and may see the market off even harder as profit taking, along with fear, takes hold over the coming days. Remember the market has risen 5.8% for the year, and 23% since June last year. A pull back of 2-3% will not dent medium-term forecasts of 5200 points by year’s end. What will dent the momentum will be stock-specific issues, where poor earnings and missed guidance occur. We are not overly concerned by the fall today and actually welcome it. This pause will give the market time to reassess its next big move.

Market Price at 8:00am AEST Change Since Australian Market Close Percentage Change
AUD/USD 1.0428 -0.0009 -0.08%
ASX (cash) 4869 -39 -0.79%
US DOW (cash) 13876 -115 -0.82%
US S&P (cash) 1494.8 -15.5 -1.03%
UK FTSE (cash) 6247 -105 -1.65%
German DAX (cash) 7628 -205 -2.61%
Japan 225 (cash) 11108 -157 -1.39%
Rio Tinto Plc (London) 36.15 -0.64 -1.75%
BHP Billiton Plc (London) 21.68 -0.47 -2.11%
BHP Billiton Ltd. ADR (US) (AUD) 37.36 -0.45 -1.19%
US Light Crude Oil (March) 96.13 -1.38 -1.42%
Gold (spot) 1673.75 2.2 0.13%
Aluminium (London) 2114 -23 -1.08%
Copper (London) 8288 -17 -0.21%
Nickel (London) 18640 -28 -0.15%
Zinc (London) 2451 -21 -0.86%
Iron Ore 154.2 1.0 0.65%

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.

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