IG Markets - Morning Thoughts
IG Markets - Morning Thoughts
Cyprus, a country with a population smaller then Adelaide (the fifth largest city in Australia) has caused one major upheaval on global markets. For a country that contributes about 0.2% of European GDP, why is a badly worded, ill thought out policy so damming to world markets? The answer is contagion.
The fear is that Spain or Italy might implement the same type of policy. Can you imagine what would happen if the next Italian Prime Minster came out and said it was going to take say five per cent off every Italian’s personal bank deposits? This is a country that is the third largest borrower (bond offerings) and has some of the worst tax evasion issues in the world; they would all withdraw their money at once. The effects would be dire to say the least, and in this strategist’s eyes - it isn’t going to happen.
All the financial newswires are reporting this as the spark that will start the fire, however you have to remember that the ECB is backstopping everything. Mr Mario Draghi has made it abundantly clear he will do ‘whatever it takes’ to return the eurozone to ‘stability’. That is the most important word in this whole debate – stability. A run on banks is the very last thing the ECB will let happen. We have seen that the LTRO loans to European banks are being repaid at a healthy rate, and he can always open the taps again if a run-on does flare up.
Yesterday’s trading responses were a tale of two reactions. Firstly, Asia probably overreacted, with Japan, the Hang Seng and the ASX all off by two per cent or more. However, Asia was playing catch up to the fact US markets closed down on Friday, with most Asian bourses finishing in the green. The biggest panic trade was in the banking sector, with Westpac losing 3.24% on the close - a bank that has absolutely no exposure to Cyprus or any other peripheral eurozone countries.
The US on the other hand took a much calmer approach to the Cyprus issue. The S&P opened down 1% before filling the gap for the rest of the day, as investors saw a run-on in European banks as a small risk and took it on. Analysts were also making calls on American banks, with one analyst suggesting BoA-Merrill Lynch has a 20% up-side from its current price, which helped the stock finish 0.08% down. At the close, the S&P lost nine points at 1552, with profit taking a kicking as the index headed back toward intraday parity; a much calmer and clearer trading day response.
Moving to Australia, and news that will affect the local market. RBA is going to be the main focus for traders today with assistant governor Mr Guy Debelle speaking on trends in the Australian debt market. Speaking of which, yesterday Australian government 10-year bond yields dropped a massive 13 basis points to 3.50% on the back of the Cyprus issue; it will be interesting to hear what he has to say about the fact that yields are trending higher.
Deputy governor Mr Philip Lowe is addressing the Australian Industry groups’ annual economic forum; this speech should shed some light on the RBA’s current perspective on the Australian economy and its green-shoots outlook. The main kicker today will be the monetary policy minutes - the fence sitting from Governor Stevens has been intact for months now, I would expect nothing less from the minutes today. However, any form of neutral-view language here will continue to add support to the Aussie dollar as a rate cut looks less and less likely.
Moving to the open, we are calling the ASX 200 up 29 points to 5044 (+0.58%). The pick-up today looks set to be in the defensives with banks the main target for investors eager to enter at ‘cheap’ entry points. BHP’s ADR is suggesting the stock is set to lose another six cents to $34.63 (-0.16%), so support is not likely to come from the cyclicals. Woolworths will be an interesting story today, having turned ex-dividend yesterday, and falling 3.38%; how much will it pick up? Its main rival Wesfarmers has added $2.81 since it went ex-dividend on February 19.
Yesterday was the
biggest fall for the ASX 200 this year at 2.05% - can this
trend continue, with the proceeding days recuperating the
losses and then extending the gains? Today we will try,
however since the February 20, the market has turned
sideways and consolidation has taken over, with little
drivers to see it higher in the short term; we expect
consolidation to take the front seat for a while before
northward prints return to the fore.
Market Price at 8:00am AEST Change Since Australian Market Close Percentage Change
AUD/USD 1.0399 0.0037 0.36%
ASX (cash) 5044 29 0.58%
US DOW (cash) 14470 65 0.45%
US S&P (cash) 1551.9 17.9 1.17%
UK FTSE (cash) 6442 83 1.31%
German DAX (cash) 7995 88 1.11%
Japan 225 (cash) 12407 92 0.75%
Rio Tinto Plc (London) 32.77 -0.35 -1.05%
BHP Billiton Plc (London) 20.54 -0.11 -0.54%
BHP Billiton Ltd. ADR (US) (AUD) 34.63 -0.06 -0.16%
US Light Crude Oil (April) 94.20 1.32 1.42%
Gold (spot) 1605.42 7.4 0.46%
Aluminium (London) 1936 -28 -1.43%
Copper (London) 7575 -177 -2.28%
Nickel (London) 16605 -295 -1.75%
Zinc (London) 1919 -35 -1.79%
Iron Ore 134.60 0.0 0.00%
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