IG Markets - Morning Thoughts
IG Markets - Morning Thoughts
Economic data again dominated the headlines last night, this time on both sides of the Atlantic. Italy managed to sell €6.5 billion of five- and ten-year bonds in the midst of the inconclusive elections. The sale actually saw yields drop nine basis points (bps) to 4.81, after having risen 41 bps on Wednesday post the election results. The US picked up where it left off on Tuesday night with the pending homes sale index jumping 4.5% to 105.9 (its highest level since April 2010), versus a forecasted result of 1.7% and the December month figure of -1.9%. This goes hand-in-hand with the US new home sales figures coming in at 437,000 for January.
Durable goods orders (excluding transport) also came in on the upside, jumping 1.9%, its biggest leap in a year, showing business investment continues to improve and sentiment is starting to flow through to tangible data. As stated yesterday the current advantage with economic risk is that it is skewed to the upside, as it is coming from a low base after several years in the doldrums. Heading into the close, the S&P 500 was up 21 points (+1.47%) to 1518 and is back in the black for the week.
Fed Reserve chairman Ben Bernanke was also back on the newswires with his address to congress after speaking to the senate yesterday. The most interesting comment to come out of his speech was his take on rates. ‘The fact that interest rates have gone up a bit us actually indicative of a stronger economy’ and ‘indicates the Fed’s stimulus is working’ he said. What I take out of this statement is the ‘wall of worry’ is cracking up. If bond yields are rising even with the Fed Reserve being the counterparty with its $85 billion a month of asset purchases, it suggests investors are looking for growth and income above the safe-haven values on offer. Make no mistake, the amount of money sitting on the sidelines is still monstrous. If even a quarter of this money finds its way to business investments and equity markets, the current rally will be assured. The comments lead risk assets to explode, accounting for most of the gains on the Dow and the S&P.
On the other side of the Atlantic, Mario Draghi has been addressing policy makers and the like in Munich today with his ‘whatever it takes’ talk taking centre stage once again. He signalled that the ECB has no intention of tightening monetary policy and that interest rates will be ‘significantly lower than two per cent’ for at least another year. He expected the ECB balance sheet to shrink organically as emergency loans were repaid, however he reiterated that he was ready to push the button on additional loans if that’s what it took. Once again the ECB is showing the leadership required to maintain order in the eurozone. Political risk is going to continue to flare up over the coming months, however a firm ECB hand should alleviate major concerns.
Moving to our region, and Australia will dominate the headline today with the local earnings season coming to a close; headline acts include Woolworths, Harvey Norman and Challenger financial. But what is even more important today is the 11:30 (AEDT) capex announcement - UBS has labelled this result as the most important financial release this year.
This figure will have a double-edged effect (both can be taken as a possible I believe). First the result can come in on the upside. This means businesses are budgeting for expansion and are ready to spend up in the current climate, not just for the remainder of FY13 but also for the full-year of FY14 (June 30 next year). It will mean GDP should increase over the coming quarters, cyclical stocks should start to leg up on their yield-playing peers and the ‘wall of worry’ in this country should begin to crumble as funds flow out of safe-haven assets and into business and equity investment alike.
Or, the figures come in on the down side. If this is the case, the RBA’s call that the non-mining sectors are on the up is not happening as fast as expected. It would almost certainly lead to additional rate cuts, (currently markets are only pricing in two cuts this year and this would add a third). It would also re-enforce the current yield-play trade in our market. Additional rate cuts would see investors piling into big yield-play names as they look for income support rather than growth to sustain their portfolios, and will push our market higher still. Like I said, this result will either drive investment or drive the RBA to cut rates; both outcomes can be seen as positives.
Moving to the open, we are calling the ASX 200 up 45 points to 5078 (0.89%) as our market plays follow the leader. Watch the yield-plays today, particularly the banks, and as the capex figures come through, Telstra, Wesfarmers and Woolworths should also see jumps on poor data. The materials space looks like it may also catch a ride north, with BHP’s ADR suggesting BHP will add 25 cents to $36.92 (0.68%) today, even with commodities sliding overnight.
It would be remiss of me not to talk about the end of the month. February has shown that there are still fundamental differences between cyclical and defensive stocks; defensives still have the wood on their cyclical peers as their earnings increased, as did their dividend yields. Today will see February closing at least 3.6% up for the month, with today adding a cherry to it with a strong finish.
Market Price at 8:00am AEST Change Since Australian Market Close Percentage Change
AUD/USD 1.0236 0.0019 0.19%
ASX (cash) 5077 40 0.79%
US DOW (cash) 14075 202 1.45%
US S&P (cash) 1519.3 23.8 1.59%
UK FTSE (cash) 6362 88 1.41%
German DAX (cash) 7713 89 1.16%
Japan 225 (cash) 11437 105 0.93%
Rio Tinto Plc (London) 35.35 0.35 1.01%
BHP Billiton Plc (London) 20.95 0.12 0.59%
BHP Billiton Ltd. ADR (US) (AUD) 36.93 0.24 0.65%
US Light Crude Oil (April) 92.86 0.22 0.24%
Gold (spot) 1596.95 -14.7 -0.91%
Aluminium (London) 2019 -11 -0.55%
Copper (London) 7863 -38 -0.47%
Nickel (London) 16738 -3 -0.01%
Zinc (London) 2312 -3 -0.14%
Iron Ore 151.9 0.0 0.00%
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