IG Markets - Trading Wrap
IG Markets - Trading Wrap
A positive tape for most of US trade fizzled out in the last hour or so after the Senate failed to vote through two separate proposals to replace the Sequester. What’s disappointing here is the index failed to take out Monday’s high and subsequently closed the day on its lows, with volumes on S&P futures increasing during the sell-off.
US data was good on the whole and while the GDP revision was poor, this was of course largely down to inventory drawdown and is likely a temporary issue. There were decent revisions to net exports and business investment, which makes for positive reading if you dig below the headline print. The sequester seems to be the bigger talking point though and the failure of Congress the reason for the sharp sell-off and strong USD inflows; although month-end flows can also be attributed to the moves.
Effectively the Office of Management and Budget has until midnight to officially order the cuts to start, although the $85 billion in planned cuts won’t kick in at once. According to statistics from the CBO if sustained the cuts would curb spending by $42 billion through 2013 and $89 billion in 2014, ultimately slicing 0.6% off future GDP. Given the market has been expecting failure for some time it was interesting to see the sell-off and we continue to focus on whether an agreement can be put in place. The sequester will continue to act as a headwind ahead of March 27, and the continuing resolution expiration, which if no action is taken could see the administration forced to find new sources of funding or cease non-core operations.
Asia has pulled back, although is certainly outperforming the leads from Wall Street. The ASX 200 started the new month on a sour note, although the banks continue to find buyers despite a poor tape. Retail seems to continue working well despite yesterday’s capex number providing little scope for the RBA to cut again in the near-term. In fact we’d go as far as saying 3% will be the trough in rates this year, which is an out of consensus call. The AUD/USD found buyers through the day after testing 1.0200 mid-sessions after a poor China PMI print. For some reason the market didn’t really care either way that it missed expectations, with the new orders component only marginally missing out on a contractionary reading. Output was probably the strongest reading of the survey at 51.2.The revised HSBC print also missing the mark. The Shanghai Composite is lower by 0.4% and its worth pointing out that new home prices rose for a ninth month in February, with prices climbing to $1,590 per square meter according to SouFun Holdings , the country’s biggest real estate website owner.
Copper has predictably found sellers, and despite the rally seen in equities, on the back of good US data recently, it has found upside hard. Perhaps this could be a telling sign and something we will be keeping an eye on.
Japan is the region’s star and is finding buyers; it’s interesting to see the base-line on the daily Ichimoku cloud spike up to 82.53. As we pointed out yesterday, there seems to be strong support for the pair and USD/JPY hasn’t actually closed below this support level since October 2. We remain constructive as long as the pair can close above here.
S&P futures were trading at 1518.5 at the close of European trade and are currently down 0.5% from this point, thus a weaker open should be on the cards for European equities. However, it has to be said that event risk comes in droves today and we’d be surprised if volatility doesn’t pick up on the first day of the new month. The MIB will be interesting in Italy, as on one hand yields continue to trade lower on speculation of a tie-up between Mr Bersani and Mr Berlusconi. Our opening call today for the index is 15885, and a likely weekly close below 16009 would therefore print a bearish weekly reversal pattern - the second in five weeks. Data in Europe will be of note with German retail sales and PMI numbers out of Germany, Spain and Italy. On EUR/USD, again we focus on the January low of 1.2998 where a break of this level should take the pair down to the 50% retracement of the July to February rally at 1.2887.
In the US, the calendar comes alive with personal income (likely lower after last month’s special dividend payments) and spending, University of Michigan confidence and the ISM manufacturing report on the cards.
Chicago Fed President Charles Evans spoke around mid-day today from Iowa, and he is fast becoming a must-hear member of the Fed. He is a visionary on the board and certainly carries weight within the Fed’s ranks. His comments today that the Fed shouldn’t undermine policies by removing accommodation prematurely and unemployment should hit the key 6.5% in mid-2015 should be of interest to economists. He even thought the Fed’s policies were working, which will have a few of the US perma-bear talking.
Elsewhere, Warren Buffett releases his annual letter to shareholders after market.
Ahead of the European open we are calling the FTSE 6353-7, DAX 7748 +7, CAC 3717 -6, IBEX 8227 -3 and MIB 15885 -36