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IG - Morning Thoughts and Opening Calls

IG - Morning Thoughts and Opening Call

Good Morning

Overnight the S&P 500 climbed, sending the benchmark index to its highest level in five years. It is now only 3% away from its all-time high in October 2007 and the US earnings season has continued to top estimates as investors turn to President Barack Obama’s State of the Union address later today. Of the 354 US companies that have now reported, 74% of them have exceeded profit expectations while 66% of those have beaten sales estimates, which is above the normal average for reporting season (data from Bloomberg). The comparisons with our earnings season will be very interesting as it heats up this morning.

USD/JPY fell back below 94 as some in the G7 bock of nations showed concern over the volatility in the yen. This comes after yesterday’s comments from the US that appeared to endorse a weaker yen as long as the Abe government didn’t actively pursue devaluation. In our opinion, these conflicting statements only add to the volatility. Japan’s Finance Minister, Taro Aso, has stated that the currency can go to 100. The fact Japan is currently looking for a new BoJ Governor, with the front runner being Haruhiko Kuroda (currently the head of the Asian Development Bank), advocating for increases in stimulus and ending deflation to ‘usher in a growth spurt unseen in a generation’ means that volatility will remain in the yen and ‘currency wars’ look like being a major theme this year.

However, last night Mario Draghi addressed Spanish lawmakers, stating that he would only employ the yet-to-be-used Outright Monetary Transactions (OMT) if major problems in the transmission of its monetary policy were to arise. This shows that the ECB still has levers in its arsenal to control the debt crisis and has seen peripheral bonds yield fall with Spanish 10-year bond yields falling to 5.3%. In the same speech, he said that current talk of ‘currency wars’ was overdone. He also exaggerated and rejected setting exchange rate targets for the euro, as some in the union have suggested, namely French President François Hollande.

With the markets now this strong, most strategists are expecting a pullback. A recent Goldman Sachs note changed its outlook on global equities from a buy to neutral in the short term. In the same note, however, it stated that buying the dips should be advantageous and that only a small correction would be need to change its neutral call back into a buy. What we are asking here in Australia is; does the same call apply here?

The ASX 200 has rallied 311 points this year alone and a staggering 974 points since the June 12 low. Having reached 4981 points in the first hour of yesterday’s trade, will Australian reporting season see us breaking through our short-term target of 4986, the 50% retracement of the 2007 high compared to the GFC low in 2009? Our feeling is likely yes, however with so many companies reporting today, the likelihood of some disappointing the market is very probable. Even if CBA produces a solid result, weight of numbers could actually hold us back and possibly drag us lower. With the last six months being a vexing one in the energy, mining services, engineering and retail services domestically, and with local companies still having overhangs from previous years, do not be surprised if the likes of Leighton Holdings, Worley Parsons and even CSL get sold off today with inline results. Investors will be actually aware of return on equity (ROE) and price to earnings (PE). We saw this last week, that even inline results and solid guidance will not be enough if the stock looks over brought and/or expensive on these metrics (i.e. MQG).

Moving to the CBA results and on the headline the numbers look good and are ahead of consensus. Cash earnings came in at $3.78 billion, up 6%; Bloomberg consensus was $3.7 billion and was at the higher end of analyst views. The heavily-followed net interest margin (NIM) came in at 2.10%, up four basis points on the previous half at 2.06, however it was lower than the year before at 2.12%. The return on equity was 18.1% (a very solid number) and the biggest pressure on the bank has been how much liquid capital will be returned. CBA has confirmed an interim dividend of $1.64 fully-franked dividend; consensus had expected $1.62. This is a very solid result and with analysts expecting a low growth year in banking, CBA has delivered. It will be interesting to see how the market reacts to this result; CBA is currently trading on a 14x 12-month earnings ratio with a 15% premium to its major peers.

Moving to the open, we are calling the ASX 200 up 11 points to 4970, as investors and analysts alike digest the results from CBA, CSL Computer Share, Leighton Holdings, Oz Minerals and Worley Parsons. As stated yesterday these results will make or break the week and possibly the current rally, as our market does look slightly over-brought. Tomorrow sees RIO stepping up to the plate with its earnings and that will govern how the materials space performs in the short term. We are expecting to see BHP moving higher today, with its ADR pointing to a 0.22% gain to $37.68.

MarketPrice at 8:00am AESTChange Since Australian Market ClosePercentage Change
AUD/USD1.03040.0060 0.58%
ASX (cash)497213 0.26%
US DOW (cash)1400451 0.36%
US S&P (cash)1520.86.3 0.41%
UK FTSE (cash)631647 0.76%
German DAX (cash)766446 0.60%
Japan 225 (cash)11393-10 -0.09%
Rio Tinto Plc (London)36.700.14 0.39%
BHP Billiton Plc (London)21.50-0.09 -0.44%
BHP Billiton Ltd. ADR (US) (AUD)37.620.03 0.08%
US Light Crude Oil (March)97.470.57 0.59%
Gold (spot)1652.054.9 0.29%
Aluminium (London)211713 0.64%
Copper (London)824145 0.55%
Nickel (London)18304103 0.57%
Zinc (London)241933 1.38%
Iron Ore155.10.0 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.

Please contact IG Markets if you require market commentary or the latest dealing price.

Market Strategist


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