IG - Morning Thoughts - 4 Mar 2013

IG - Morning Thoughts

Good Morning

Friday night saw both the Dow and the S&P 500 finish in the green, with the Dow rising to its highest level in five years.

This occurred as US economic data outshone US and European political dramas.

On the open, the Dow, the S&P and the Nasdaq all looked like following Europe and Asia down as sequester headlines dominated business media. However, the release of the consumer sentiment figures were followed immediately by the much-watched manufacturing PMI index (which showed strong expansion at 54.2) and the US markets took off.

The risk rally was then enhanced further with Chairman Bernanke’s speech on Saturday morning (AEDT) stating that ‘a hasty end to easing could backfire’. This dampened the fears sparked on February 21 when the Fed minutes showed some members wanted to wind it back, which sparked a global sell-off. Mr Bernanke’s speech saw all three major US indices finishing in the green for the today and the week.

However, later that day after the major trading session closed, political risk kicked in and sequester, ‘so onus that it won’t come to pass’ was signed into law by President Obama. The so-called ‘grand bargain’ of the 2011 debt ceiling negotiations is now law, and $85 billion worth of automatic cuts to government spending will kick in this year which the Congressional Budget Office estimates will cause a 0.60% reduction in economic growth in 2013 alone. What the bill also states is that it is designed to take $1.2 trillion in spending over a nine year period. The 0.6% reduction this year will be nothing compared to coming years.

However, it is obvious that a retrospective deal will be done; President Obama has spent all weekend calling policy makers from both sides of the house to find a way to strike a deal that will alleviate the cuts.

I believe sequester as another political distraction that will cause some investors to cash out and buy back in on the dips. What I see is that macro data is finally taking a back seat and markets have changed views. Over the last three years of dread, top-down macro views have dominated investment thinking - now bottom-up views are taking precedence. Sequester is a top-down political distraction, so watch for dips to be snapped up.

Asian bottom-up views will be tested this week as the region goes through a plethora of major macro data, particularly Australia. Today sees the release of building approvals month-on-month and tomorrow is the all-important cash rate and RBA statement (I don’t expect this to change, the RBA language however will be interesting), plus retail sales. On Wednesday Australian GDP data is out followed by the trade balance on Thursday. Don’t be surprised is if most pieces of data come in on the down side; it has been well flagged in leading indicators.

At the same time, Japan will start its BoJ transition with its monetary policy and press conference on Thursday as well as releasing its current account. This will be the first real look at whether or not Prime Minster Abe’s policies are starting to filter through. We have seen during the Japanese earnings season that exports are still struggling, with several companies find it hard to make profit. The current account will give us a gauge as to how the policy changes have impacted Japan’s struggling economy.

Friday is the big one with China’s trade balance, and with Beijing essentially in lock-down ahead of the annual parliamentary session (which will be heightened by the once-in-a-decade leadership change), the economic indicator will dominate our market. Still in Beijing, tomorrow the National People’s congress will outline the nation’s economic and social objectives for the year, as well as the political restructure. This is one of the single most influential pieces of news for our market this year, as risk stocks look to Asia (particularly China) to leg up and join the bull run global markets are experiencing. Watch the pure plays and energy stocks this week as Chinese economic policy filters out into the newswires.

Moving to the open, we are calling the ASX 200 down 13 points to 5073 (-0.25%). As Asian markets are the first to digest the sequester bill and with no firm leads from the US as yet, we will have to feel our way through today as investors weigh up the risks for the bill remaining in law. Most of the today’s drop looks to be a 13-point deduction due to dividends. 13 stocks turn ex-dividend today, including BHP, and BHP’s ADR is suggesting the stock will drop 62 cents to $36.22 (-1.68%); 55 cents of the predicted fall is BHP’s fully-franked dividend.

This week looks like it will materialise into a possible pull-back, with macro data and dividend disbursements taking chucks out of the market. It is healthy and required for longer-term strength. I would not be surprised to see 4% to 5% pull-back from current levels.

EVAN LUCAS
Market Strategist
www.igmarkets.com

ENDS

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