IG - Morning Thoughts
Friday night saw another very benign trading day in the US with the S&P 500 again subdued, moving through the 10 point range to close the week at 1520 (one point off for the session but remaining at five-year highs). What is interesting from the US trading day was the release of the University of Michigan’s consumer sentiment numbers, which beat expectations by 1.5 points at 76.3. Last week we saw the release of Australia’s consumer sentiment figures and they reiterate the US numbers jumping to 7.7%, showing that global consumers are becoming more optimistic. While this hasn’t filtered through to official figures as yet, it is only a matter of time as the year progresses.
What is also becoming apparent is that the wall of money out there is starting to crack up. No more is this evident than in the yields of US 10-year bonds. Over the weekend, 10-bonds yields rose to their highest level for the year at 2.06% and now look like holding above the 2% range (even with the US Federal Reserve sitting on the other side of the trade, snapping up $85 billion a month in mortgage-backed securities and treasuries). This is the worst start to year for bonds since 2011 as investors start to notice that the US recovery is taking a firm foothold and the momentum in the markets is starting to pass them by. Never underestimate the power of the herd. The fear of ‘missing out’ is definitely overtaking the fear of ‘losing out’ and the more markets run, the more this money wall will shift. This is also seen in gold, which is now at its lowest level since mid-August last year ($1,604 per ounce) and trending lower. The safe-haven store of value looks completely friendless as investors pull funds from the commodity and move into other markets where growth and return comes standard.
Australia is in a similar position; 10-year bonds are holding above 3.50% (very appealing to global investors), but what is more appealing to them is the quasi-bond play. 6+per cent yields are not to be sneezed at by any investor; global investors (and local investors) know that the companies they are investing in have very solid balance sheets, have the capital required to pay out, are well managed and are growing at a consistent rate. It is why the Australian dollar will struggle to fall below $1 as global investors will look at 0.X% in their own country compared to 3.5% and more in Australia, and will snap up any opportunity to enter our market for the return on offer.
This is why this week will be interesting; will the ASX 200 somewhat balance itself out, as cyclical stocks such as BHP, FMG, Woodside, Santos, Bluescope Steel et. al. report either their half year or full year results? There is no doubt that short selling in these companies is starting to be squeezed. The unwinding was seen on Wednesday as RIO, FMG and BHP all rallied hard heading into RIO’s full year results.
BHP jumped over 2.5% on Wednesday with short positions unwinding as investors look to BHP’s Wednesday earnings release, which may potentially surprise on the upside. The petroleum division of BHP is in better shape than most investors believe and the iron ore division continues to churn out record production levels. Yes, commodity prices dropped away over the last three-to-four months of 2012 but the regulation of supply by the company should counter this concern. If BHP can produce a solid result, the balance may just start to take off and the current run in the ASX will continue to power on.
Moving to the open, we are calling the ASX 200 flat down 4 points to 5030 and this call includes 18.18 points lost due to Telstra and Commonwealth Bank going ex-dividend in the pre-market. Where these monies go will be the question; will investors rotate out of CBA and TLS into other yield stocks, or move into high growth stocks? Having seen the rally in Westpac over the last few weeks, the answer looks to be yield plays. Watch for the likes of ANZ, NAB, WBC, WOW and WES to benefit from the switch out of CBA and TLS. I would also suggest that the drop in CBA’s share price will not be much more than the dividend price. The result on Wednesday coupled with the prospect of continued dividend and share price growth, might be enough for investors to jump on board today, as any dips are looking like a time to buy at the moment. We are expecting to see BHP moving slightly higher today, with its ADR pointing to a 0.07% increase to $38.61. Our market is now at levels not seen since 2008 and looks to be heading to 5400 points by the end of the year rather than under the 5000 mark. If local earnings follow last week’s leads, the prospect of marking this as the sixth straight up week (and twelfth of the last thirteen) looks increasing likely.