IG Markets - Morning Thoughts

IG Markets - Morning Thoughts

Political risk is once again taking centre stage, with the headline statement from the Italian elections being ‘projections show a risk of ungovernability’.

We have stated time and time again that Europe will be a distraction this year and that if any issue were to arise out of the eurozone it would be political, not economical.

There was always a risk that the people of the PIIGS (Portugal, Italy, Ireland, Greece and Spain) nations may reject austerity heaped upon them, and the Italian elections show that they have. Don’t forget Italy is the third most indebted nation and has a debt-to-GDP ratio of 120%, and paying higher taxes is needed. However, the Italian people have rejected this idea and it looks like the nation may have to go back to the polls.

The knock-on effect of the result was monstrous. EUR/JPY had a 455 point range, down 3.4% to 118.97, USD/JPY had a 378 point range down 2.4% to 91.07 as the flight to safety took over (remember on the risk ladder scale the yen is classified as the safest currency). Italian 10-year bond yields jumped four basis points (bps) to 4.49% after plummeting 28 bps earlier in the session.

Europe managed to close mainly in the green as the election results were posted well after the close. The US however was not spared, and saw a 0.7% positive start turn into a 1.1% drop. The S&P 500 is heading into the close 18 points down and is now back below 1500 points to 1499, as investors jump back to safety. US 10-year bonds have advanced as yields were pushed back below 1.90% to 1.89%, while the VIX index (fear-gauge) jumped 25% to 17.77points. To put this figure in prospective, during the GFC and the preceding three years of dread, the VIX index was as high as 45 to 50 points, so this figure is still very low.

However, as we debated yesterday, Australia has no real connection to the political and economic issues in Italy other than the fact it will impact European sentiment, which tends to be a very soft lead for our market anyway. What we concentrate on is the region that matters - Asia Pacific. Now the fact that the US has reacted strongly to the volatility created by the elections, we will most likely follow their leads today. However, there was some interesting news out of China yesterday other than the disappointing flash manufacturing PMI figures that should provide a bright spot.

There is a real sense in China that the new leadership group lead by Xi Jinping will introduce steps to boost expenditure in the world’s second biggest economy. Consumer spending in the country has lagged recently and there is an expectation the new centralised government will revamp policy in an effort to streamline bureaucracy and boost an economy that has just experienced is slowest growth period in 13 years (reports from Xinhua News Agency).The report goes on to say that there is a buzz around the new leaderships desire for higher quality and sustainable growth. Any form of upward momentum in China will have a flow-on effect on our market and the Aussie dollar as we remain the best quasi-China play around.

Moving to our market, gold, silver and gas all jumped overnight on the political instability. After four weeks of spiralling lower, watch for a possible pick up in gold stocks. NCM, RRL and KCN have all taken a battering over the past month and a pick up may be in order today on the back of the gold price. Earnings season continues to roll on with the likes of QBE, OSH, FLT and BPT the main focus today. Although these stocks are unlikely to swing today’s market momentum (which will be down), they are comparable to sector peers. QBE has a hell of a flight on its hands when compared to IAG, while OSH will be compared to STO, and after STO had double digit growth in headline numbers OSH will need to match this.

Moving to the open, we are calling the ASX 200 down 53 points to 5003 (-1.04%) as euro fears override the positive underlying equity fundamentals. Watch the yield plays today, particularly Telstra, Wesfarmers and Woolworths as the flight to ‘income safety’ will be heightened by the sell-off. Cyclicals on the other hand do not look like they will be spared, with BHP’s ADR suggesting BHP will fall 1.86% today, down $0.69 to $36.21. This could mean the mining company will have dropped $3.13 (7.9%) since last Wednesday’s high of $39.34.

However, we need to keep today’s moves in prospective; we are up 408 points for the year - that’s 8.7% - and we are up 177 points in February alone - a 3.6% increase. Today is just a correction and is unlikely to dent the confidence investors have in the local market.
Market Price at 8:00am AEST Change Since Australian Market Close Percentage Change
AUD/USD 1.0274 -0.0011 -0.11%
ASX (cash) 5003 -53 -1.04%
US DOW (cash) 13787 -206 -1.47%
US S&P (cash) 1489.8 -28.3 -1.86%
UK FTSE (cash) 6244 -107 -1.68%
German DAX (cash) 7637 -51 -0.66%
Japan 225 (cash) 11195 -423 -3.64%
Rio Tinto Plc (London) 35.30 0.54 1.55%
BHP Billiton Plc (London) 21.24 0.30 1.42%
BHP Billiton Ltd. ADR (US) (AUD) 36.21 -0.69 -1.86%
US Light Crude Oil (April) 92.27 -0.80 -0.85%
Gold (spot) 1593.30 9.2 0.58%
Aluminium (London) 2035 -8 -0.41%
Copper (London) 7832 -1 -0.01%
Nickel (London) 16708 -201 -1.19%
Zinc (London) 2296 -8 -0.34%
Iron Ore 151.9 -1.7 -1.11%

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.

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