IG Markets - Closing Wrap
IG Markets - Closing Wrap
Last week showed further evidence of correlation break-downs in different asset classes, with the ASX 200 gaining 1.4%, while AUD/USD lost 117 pips and NZD/USD an even more impressive 130 pips. In Europe, the FTSE put on 0.7%, while the EuroStoxx index fell 0.5% with Italy’s’ MIB reacting to the political uncertainty dropping 3.4%. This was certainly not assisted by the thirty-five basis points move higher in the ten-year bond. These breakdowns in correlations should be celebrated, and while this is great news for stock pickers (as they hate a rising tide lifting all boats), it once again highlights the growing link between a weak currency and a strong equity market.
The S&P 500 may have put on a solid show towards the latter stages of Friday’s trade, but today, futures signal that if the market were to open now, then weakness would be seen. Given the strength witnessed in Japanese equities today, we question whether futures traders are looking more closely at USD flows, the Shanghai Composite and the Hang Seng. Weekend news flow was generally quiet, although you could say that on the whole it has appeased the bears, with no progress in US budget talks or the Italian political situation. In fact, both issues seem to have taken a modestly negative twist, especially the latter where a senior official to the Bersani party suggested that Italy might have to hold an election later in the year if the Democratic Party is unable to find a majority in the Senate. These comments can be added to press that Beppe Grillo has been suggesting abandoning the EUR, and you can see that EUR/USD and EUR crosses may struggle to find any love this week. Interestingly, the fast money hedge fund community is already sniffing further weakness in EUR/USD and have taken net positioning (according to the weekly CFTC data) to a modest negative read of 9400 contracts.
The ASX 200 has seen a decent clear-out of long positions today, although it has to be said that thirteen of the 65 points the index lost were from dividends. We remain constructive on the market, but feel the easy money has been made. For the value investors out there, according to Goldman Sachs the index is currently trading on a twelve months price to earnings ratio of 14.4x, which is 7% above the ten-year average, though still well off the levels seen in 2008/09. Fundamentally, it’s getting expensive against historical standards, but certainly hasn’t reached extremes yet.
As mentioned, Japan is finding buyers and reached a new high of 11767, although failed to maintain the gains as USD/JPY found sellers through the day. As said last week, we remain USD/JPY bulls as long as it maintains its run of closes above the base line of the Ichimoku cloud. China has been the big story today is the key reason why AUD/USD has dropped to 1.0167 and our European opening calls have found sellers. A 2.4% fall in Australian building approvals and a +0.2% gain (below the +0.6% gain expected) in Q4 inventories are also not helping, and this suggests there could downside risks to Wednesday’s Q4 GDP print (consensus sits at 0.6% growth). Further talk of measures to cool the Chinese property sector saw the Shanghai property index fall over 7%, which was its worst day since July 2009. Although inflation is under control, property speculation seems to be the number one issue for authorities right now and has to be monitored, with talk of a ‘housing bubble’ being thrown into the mix again. We were premature on suggesting closing AUD shorts, and it will be interesting to see if the pair can have a daily close below 1.0149 (the low of the multi-month range).
On the whole, last week was about being long USD all the way. While the weekly CFTC data portrays futures holding as of last Tuesday, total net-long USD positions increased from $1.48 billion to $14.4 billion, with probably the biggest increase taking place in USD/CAD, where the hedge funds went from short 21,400 contracts to long 19,400. We feel the USD will once again be the place to be and believe a daily close for EUR/USD below 1.2998 (January 4 low and bottom of this year’s range) could be the trigger for fresh shorts to be added, with stops above the February 27 and 28 high of 1.3170. The ECB meeting on Thursday could be a major catalyst here. With ECB President Mario Draghi already talking about how the moves in EUR/USD could have an effect on future inflation and growth, and late last week suggesting inflation in 2014 would be ‘significantly’ below 2%, there is a distinct possibility he could give the signal that the bank is ready to cut its refinancing rate.
CPI was already at 1.8% in February, the lowest level since 2010, and while Friday’s PMI data showed further economic pain for France and Spain, a rate cut could certainly help sentiment. The ECB has a target of 2% inflation and on its forecasts (made in December) it expects it to fall towards 1.5%; any change in these projections to the downside should see the market respond and price in future rate cuts - again EUR/USD should fall and that’s before we even get to Friday’s payrolls report.
The eyes of the market now fall on Federal Reserve Vice Chairman Janet Yellen talks tonight in US trade with a speech titled ‘A view from the Fed’. Professor Yellen is a well-known dove and this may come out in the narrative. It is becoming more and more apparent that while there is a robust discussion on future policy, the core of the Fed (Bernanke, Yellen and Dudley) is really made up of the key officials that have the final say and thus the Fed Vice Chairperson’s comments will carry weight. Any rallies in GBP/USD, EUR/USD and AUD/USD could be sold and pullbacks in USD/CHF bought.
Ahead of the European open we are calling the FTSE 6352 -26, DAX 7687 -21, CAC 3694 -5, IBEX 8144 -43, MIB 15632 -43