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IG Markets - Morning Thoughts

IG Markets - Morning Thoughts

One central bank down, two to go, although the BOE meeting should not surprise us with any new policy initiatives. The Federal Reserve disappointed a few, who for some reason had positioned themselves for a fresh round of asset purchases. We believed the most likely forum for this to take place would be September’s meeting, potentially using the Jackson Hole Symposium to prepare the market. We also thought there was a good chance we may see the Fed push out its guidance for lifting its funding rate from ‘late 2014’ to mid-2015, hence the reaction in the long end of the curve. The bank did suggest that ‘economic activity decelerated somewhat over the first half of this year’ and ‘that the Commission will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed’, so the door is still ajar. However, with the US election looming, Friday’s payrolls report will get that much more attention.

The move in risk assets made it clear that traders had positioned themselves for a more definitive Fed, with AUD/USD pulling back 77 pips to test Monday’s low of 1.0449, while EUR/USD fell from 1.23 to 1.2218. The S&P, after seeing modest gains, descended to a low of 1373 and closed not far off this level down 03%. This has provided the Australian market with a slightly negative lead, especially given US futures were up a touch at our cash close yesterday.

As it stands, we are calling the ASX 200 to open down five points at 4258, although today is really about positioning ahead of arguably the key event risk tonight, the ECB decision. Expectations for aggressive policy moves from the ECB were certainly elevated, but given the stance of the Germans over the last couple of days, some of the fast money has exited risk assets as traders come to terms that inaction by Mario Draghi and his team will cause a sharp sell down in equities, commodities and risk forex. It’s hard to get too excited by the upside in stocks today knowing that tomorrow we could be down 1% or so if the ECB disappoints, so it’s feasible that defensive names continue to work.

Domestically we get prints on June trade balance, while June retail sales should also grow 0.7%, backing up a reasonable May print (0.5%). We don’t expect either to move the risk dial too much, although there could be some modest changes to expectations for next week’s RBA decision, with the money markets now only pricing in an 18% chance of a 25 basis-point cut, as opposed to last Monday where it was suggesting a 64% probability. Clearly the money markets are simply following developments in Europe, and as sentiment improved last week on the back of Mario Draghi’s comments, traders priced out the probability of cuts.

It is interesting to see further colour from former RBA board member Warwick McKibbin, urging the central bank to intervene in the currency markets to limit the AUD strength. We are sure there a few exporters who would echo this sentiment, and with such a limited supply of AAA-rated securities in circulation globally, and compelling yield, the AUD will continue to be a favourite among investors and should still distance itself from the slowdown in global growth.

On a stock level, BHP’s ADR is suggesting an open at $31.63, down 0.7%, which suggests Rio Tinto could follow suit with an uninspiring open. Eyes are on the banks with Nomura the first investment bank to downgrade CBA on valuation ground after its stellar rise; will we start seeing a switch into NAB which hasn’t taken part and is trading on half the book value? It will also be interesting to see if we see follow-through buying in Intrepid Mines and PaperlinX, who saw huge moves yesterday and will likely see further trader inflows.

Market Price at 6:30am AEST Change Since Australian Market Close Percentage Change
AUD/USD 1.0456 -0.0049 -0.46%
ASX (cash) 4258 -5 -0.12%
US DOW (cash) 12975 -45 -0.34%
US S&P (cash) 1373.7 -4.9 -0.35%
UK FTSE (cash) 5717 86 1.53%
German DAX (cash) 6751 -22 -0.33%
Japan 225 (cash) 8670 28 0.32%
Rio Tinto Plc (London) 30.03 0.57 1.92%
BHP Billiton Plc (London) 18.93 0.24 1.28%
BHP Billiton Ltd. ADR (US) (AUD) 31.63 -0.07 -0.23%
US Light Crude Oil (September) 88.87 0.83 0.95%
Gold (spot) 1600.2 -14.1 -0.88%
Aluminium (London) 1862.5 -24 -1.29%
Copper (London) 7445.125 -98 -1.30%
Nickel (London) 15588.5 -270 -1.70%
Zinc (London) 1887.375 -34 -1.78%


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