IG Markets - Afternoon Wrap

IG Markets - Afternoon Wrap

The Asian equity juggernaut rolls on and new highs were seen in the ASX 200 and Nikkei, although both failed to hold the early gains. In Australia, the market gave WPL the thumbs up, although the overall quality of the result was poor and helped by a descent PRRT (petroleum resource rent tax) accounting credit, while the hunt for yield doesn’t seem to run out of steam with financials and certain staples names doing nicely. BHP has been the key focal point and while its earnings were down 43% and pretty much in line with consensus, analysts were more interested in $944 million ($1.9 billion annualised) in costs outs over the last six months and the announcement that current CEO of Non-Ferrous division Andrew McKenzie will replace Marius Kloppers on May 10. There is no messing around with BHP and there seems to be a cautious, but optimistic view that a cultural change may occur, and perhaps as we have seen from Sam Walsh at Rio Tinto, the word ‘shareholder’ will be banded more often.

Japan has been thrown around by further rumour with a local publication now suggesting Toshiro Muto is no longer in the mix to head up the BoJ. USD/JPY rallied to 93.83 on the news and probably would have got even more of a leg up if the story had actually quoted an official, but the subsequent 50+-pip fall throughout the day suggested the market wanted to see fact rather than headlines. Interestingly, today’s January trade balance numbers blew out to ¥1.63 trillion, clearly helped by the weakness seen in the JPY with exports gaining 6.4%, while imports grew 7.3%. Unfortunately the recent JPY weakness doesn’t help everyone and there will be areas of the economy that are seeing the price of goods rise as a result of the JPY moves.

On FX side it was the NZD that has been the mover on the day after RBNZ Governor Graeme Wheeler pushed the Kiwi’s firmly into the debasement trade. Mr Wheeler said the bank is prepared to use the cash rate if and when required, but also highlighted that the NZD overvaluation was driven by other central bank policy. The market has now lowered expectations of future hikes, with the OIS market looking for 30 basis point (bps) over the next twelve months (from 37bps pre-speech). Long AUD/NZD (as seen below) looks good for a contrarian play and has broken the short-term downtrend.

US futures have moved up modestly though Asia and should keep the S&P 500 supported on open as things stand. The cash close at 1530.9 is now only 35 handles away from the closing high on 9 October 2007 at 1565.15, and it seems now to be getting the extra kicker of an increased bout of M&A. The index needs to have weekly close above the bearish wedge at 1526, formed since the October 2011 lows to make a clear run at 1576. January housing starts will be released in upcoming trade and could be the catalyst to further upside in prices.

Our European calls are mixed today and while another flat read is currently seen, we feel we could see volatility increase in upcoming trade. The UK jobs picture will be in focus, which could add to sterling’s pain, although a holding pattern could be seen ahead of the FOMC minutes in late US trade. Recall the last set of minutes caught the market off guard and saw strong USD inflows as some officials (probably non-voters) thought it a good idea to stop asset purchases now. The remaining members were split between curbing asset purchases mid-way through the year, while others towards the back end of the year. Considering as the Fed is doing a good job in constantly hitting the market with its individual views on policy, we’d be surprised if we heard anything that deviates from current positioning, but you never know; so some traders may run with a reactionary strategy as opposed to prophesising. Our suggestion that traders will look to buy dips in EUR/USD towards the 50-day of 1.3306 proved aggressive, with 1.3329 the session low. We feel buying on a daily close (9am AEST) above 1.3420 could interest some traders as momentum tools would once again be suggesting higher levels are on the cards. Gold will also be keenly watched, with key support at $1590 (August 15 low), ahead the bottom of the channel at $1581.

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