IG Markets - Trading Wrap

IG Markets - Trading Wrap

FTSE 6270 -7

DAX 7617 -17

CAC 3647 -4

IBEX 8053 -26

DOW 13961 -10

NAS 2771 -4

S&P 1515 -2

Oil 96.88

Gold 1645

It seems that European markets will see another tepid open, although traders will have to be alert and prepared to be nimble given the number of key personnel ready to hit the wires in upcoming trade. Perhaps the key economic release will be UK January CPI/RPI, with the former expected to print a fourth month in a row at 2.7%. The BOE will release its quarterly inflation report as well. Keep an eye on GBP/USD on a miss of consensus, with the pair looking like it wants to break the February 5 low of 1.5631, a close below this pivot should continue to assist the FTSE. With EUR/JPY finding buyers throughout Asia, long FTSE/short DAX seems to be a good index derivative of the forex market.

Asia has thrown up some interesting moves with headlines that North Korea has been conducting nuclear tests to the slight expense of the Kospi and KRW (won), while at the same time the JPY juggernaut has once again found itself at the centre of attention. The Nikkei re-opened after being offline yesterday and clearly took heart from Finance Minister Akira Amari’s comments that the Japanese market will rise to 13,000 by March. With Q4 GDP expected to grow 0.4% later this week, after contracting a massive 3.5% in Q3, clearly the Japanese government is enjoying the strong positive feedback loop between loose monetary policy, asset prices and subsequent improving economics. Comments from US Treasury member Lael Brainard that the US supports Japan’s efforts to boost growth gave investors another green light to sell the yen and USD/JPY rallied to 94.46, the highest level since May 2010. Perhaps these actions will infuriate France, which is showing increasing concern about currency devaluations. However with the US and Germany (after comments from Jens Weidman and Wolfgang Schaeuble yesterday) showing a lack of concern, it seems the upcoming G20 will go ahead quite smoothly, with Cyprus (and horsemeat) the more pressing issue. Besides, have the Japanese even done anything yet? All we’ve really seen is a lot of promises and rhetoric of future action!

The Nikkei however looks set to test the recent high of 11498, and we just can’t get bearish USD/JPY, even though rate differentials and other fundamental drivers suggest the yen should be higher. If you’re a hedge fund it is still dangerous to get aggressively short, given the likely barrage of headline risk ahead of the change of BoJ leadership and upper house elections in July. The path of least resistance for the Nikkei is higher (in our minds).

The ASX 200 continues to tread water ahead of the April 2011 high and 50% retracement of the all-time high to GFC low at 4986, and consolidation seems to be the name of the game. Like the FTSE and Nikkei, the Australian index could benefit from a domestic currency that looks shaky. Earnings from heavyweights CSL and CBA tomorrow could rock the boat though, especially with CBA setting precedents for the rest of the banking space. Buying pullbacks to the November 16 uptrend at 4878 could possibly be the way to go.

US futures have barely reacted to the Korea/Japan moves and thus our open calls for Europe have hardly moved. This may change as traders focus on speeches from Fed members George, Lockhart, Plosser and Lacker throughout European and US trade. We still feel some of the recent forward-looking narrative from Chicago President Charles Evans will be key going forward, especially on his views around linking employment not just to the Fed funds rate, but an end of QE. However as we go into the June FOMC meeting (a meeting we feel will be pivotal for the USD) comments from other members will shape expectations ahead of this. Mario Draghi will also speak in Madrid, while earnings from Coca-Cola, Barclays and L’Oreal will be in focus. Barclays seems to be lacking a bit of a catalyst after trading in a range of 2.85-.307 since mid-January. Valuations are still cheap on 6.6x and 0.8x TNAV (net asset value), so perhaps the result could be the spark to attract buyers.

The local market got off to a strong start this morning, rising to a fresh high of 4981.5 before pulling back in afternoon trade. We came within striking distance of the key 5,000 level as the ASX 200 traded at its highest level since April 2010. Today’s move higher is partly due to the weakness we are seeing in the AUD. AUD/USD has just traded at a new low of 1.0245 and remains under pressure as the market braces for a prolonged easing cycle. With some big names set to report over the next few days, we are starting to see some positioning kick in today. Should these reporting names fail to impress, this could be the trigger for a near-term correction. Commonwealth Bank (CBA) continues to charge higher into its results and traded at a fresh all-time high of $65.74 today before sliding back on profit taking. This report has the potential to make or break the market tomorrow. Bradken’s result was one of the highlights of the day as the stock’s 9% rise in profit led to a 9% rally in its share price and also lifted the rest of the mining services names. Margins were slightly below expectations but cashflow was strong at $70.8 million. We’re just starting to see stability return to some of these industrials names, which had been struggling on fears of a mining slowdown. BKN has actually experienced increased demand for its products from the resources industry. Leighton Holdings (+2.4%), Monadelphous (+2.1%) and Boart Longyear (+9.4%) are all enjoying a fairly solid day. JB Hi-Fi has come off 0.7% today with some analysts downgrading the stock after yesterday’s results. Part of move yesterday had also been fuelled by some short covering. The rest of the retail space is actually holding up reasonably well today, with gains for the likes of Harvey Norman (+1.7%) and Myer (+1%).

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