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IG Markets - Morning Thoughts

IG Markets - Morning Thoughts

The S&P 500 pulled back for the first time in two days amid disappointing earnings from the likes of Akamai Tech and Scripps Networks, while the euro slid further on statements by ECB President Mario Draghi that the currency’s strength could hurt eurozone recovery. Heading into the close the S&P was down 0.34% to 1,507 and followed most European markets lower.

All eyes were on Europe over night as the ECB meet in Frankfurt to discuss the region’s finances. The official rates were left at record lows of 0.75%, with Mr Draghi noting that ‘the exchange rate is not a policy target, but it is important for growth and price stability…We want to see if the appreciation is sustained, and if it alters our assessment of the risks to price stability’. These statements saw the euro drop just over 1 cent in US trade as the DAX climbed with Germany’s export-driven economy benefiting from a softer euro. EUR/USD dropped to 1.339 after reaching a 1.371 early this week, the top of Goldman Sach’s long call from three weeks ago. Currently the pair is resting just above the low at 1.3400.

Europe looks like being the scapegoat once more for market pullbacks. The current rally has been going for over seven months and investors are looking for any reason to justify a pullback. What we note is that the latest data shows the eurozone is stabilising. More work is needed however Mario Draghi’s ‘whatever it takes’ comments that came in June last year was the flash point for the current rally and he is holding true to his word, meaning Europe is going to be a distraction not a disaster.

What we are concentrating on is local data and this week showed that Australia is still struggling to kick in to gear. Yesterday saw a false positive with the unemployment figures; although the official figure dropped to 5.4%, drilling down full-time employment lost 9,800 jobs while part-time work filled the void adding 20,200. There is no doubt this is weak, and following the retail sales numbers and the dovish views of the RBA, household spending is going to remain subdued. The ANZ job adds data at the start of the week predicted this, showing a tenth straight month of contractions, meaning the main headwinds to the economy still remain - job security, income growth and consumer sentiment.

This is why the likes of Telstra, Wesfarmers, Woolworths and the big four banks are driving our market higher - investors are searching for income. The fully-franked dividends on offer from these major names have seen these stocks rally as much as 25% in a three month period and with the likelihood of a rate cut looking more and more likely, they will continue to do so. If the bull market of 2013 is going to kick off (and we do think it will) risk has to kick in, not that owning BHP and RIO is considered a ‘risk’ in the market sense. BHP is our largest-listed company, with one the most diverse mining portfolios in the world, however mining is considered cyclical and with a dividend yield of approximately 2% it finds itself in the cold.

These cyclical stocks will find support this year. Japan now looking for a ’bold policy leader’ to take over the now vacant governor position at the Bank of Japan and with Chinese terms of trade and GDP showing the ’hard-landing’ fear is abating, support will come and our market will leg higher.

Moving to the open, we are calling the ASX 200 down 0.22% to 4923 as the market takes a breather. The pullback today will most likely see the ASX finishing the week even. We are expecting to see BHP coming off slightly today, with its ADR pointing to a 0.14% drop to $37.60. However we do note that iron ore is holding above the $150 level at $155.1 per tonne.

The pullback we saw this week was needed as the market has been on a tear for such a long time. The pause will give the market time to reassess its next big move as we head into a major part of the local reporting season. With it being Friday, watch for the afternoon ‘reassessment’ period as traders look to close out positions before the weekend to start afresh on Monday.

Market Price at 8:00am AEST Change Since Australian Market Close Percentage Change
AUD/USD 1.0282 -0.0040 -0.39%
ASX (cash) 4923 -11 -0.22%
US DOW (cash) 13944 -27 -0.19%
US S&P (cash) 1509.3 -0.8 -0.05%
UK FTSE (cash) 6246 -47 -0.75%
German DAX (cash) 7608 15 0.20%
Japan 225 (cash) 11343 -6 -0.05%
Rio Tinto Plc (London) 36.60 -0.00 -0.01%
BHP Billiton Plc (London) 21.55 -0.29 -1.34%
BHP Billiton Ltd. ADR (US) (AUD) 37.60 -0.05 -0.14%
US Light Crude Oil (March) 95.80 -0.93 -0.96%
Gold (spot) 1672.40 -7.5 -0.45%
Aluminium (London) 2103 9 0.41%
Copper (London) 8209 -34 -0.41%
Nickel (London) 18136 -177 -0.97%
Zinc (London) 2415 3 0.11%
Iron Ore 155.1 0.0 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.


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