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IG Markets - Morning Thoughts

IG Markets - Morning Thoughts

The interesting dynamic that is shaping up behind the scenes on a macro level is the ever changing views on potential central bank action. Don’t be fooled by a flat close on the S&P, with the index trading between 1407-1403, while the Dow traded 13190-13154 after the unwind of the market. This simply highlights the indecision that traders have after a strong run of late and a repricing of central bank action.

Expectations for QE3 are being lowered by the day and clearly this can be seen by another sell-off in US treasuries with the ten-year bond moving eight basis points higher on the day. We have now seen a 44-point move to the upside since the recent low of 1.37% and traders could target a move to 1.88% (50% retracement of the March-June rally) in the short-term. The market needs to decide now whether a lack of QE is such a bad thing given the main reason it won’t be administered is because the economy is improving relative to expectations. The short-term focused traders will prefer the immediate ‘sugar-high’ that QE3 invokes, however we also believe Dr Bernanke will be mindful to keep the ‘Bernanke put’ alive. Last night’s US CPI and empire manufacturing both came out below expectations, however the industrial production print at +0.6% was enough to keep the move higher in treasuries going.

We will pay close attention to views from Fed member Narayana Kocherlakota tonight. There are a few Fed members scheduled to speak between now and the Jackson Hole symposium (August 31), and while he is not a voter until 2014 his view may potentially echo those who are sitting on the fence within in the Fed.

On the other side of the pond, Europe remains a source of concern and hope. Comments from EU Commissioner Olli Rehn suggested that Spain is paying careful consideration to receiving assistance from the ECB/EFSF/ESM. Spanish two-year bonds fell eight basis points on comments that Spain has an ‘open mind’ on an aid request. So how do risk assets like EUR/USD trade given the lower probability of Fed action and a good possibility that the Spain will look for assistance? It seems logical that range trading will remain in the short term.

Locally the lead isn’t great, although we still see a modestly higher open for the ASX 200. The banks (as always) could dictate the broader ASX 200 and Credit Suisse’s and UBS’s downgrade to CBA could be telling as they have cut the stock to underperform suggesting an in-line result doesn’t justify its premium. Given the bank goes ex-dividend on Monday, we doubt the downgrade will attract too much attention as investors will want to hold on for the A$1.97 dividend.

BHP’s ADR is suggesting an open 15 cents lower, so this may weigh and it will be interesting to see the price action in Fortescue given yesterday’s strong sell-off as a broker suggested it may need to refinance if the iron ore price drops much further.

On the earnings front we are watching AWC, AMP, ASX, BXB, DXS, REA and WES. On first blush AMP’s underlying profit looks strong relative to consensus, and it has a strong capital position above the Minimum Regulatory Requirement (MRR). With regards to Wesfarmers, analysts are looking for NPAT (pre one-off items) of A$2.137 billion up around 14% with a final dividend of 90 cents. Don’t expect much on the guidance front as they tend not to provide much colour here.

Market Price at 6:30am AEST Change Since Australian Market Close Percentage Change
AUD/USD 1.0505 0.0030 0.28%
ASX (cash) 4289 8 0.18%
US DOW (cash) 13168 28 0.21%
US S&P (cash) 1408.2 4.9 0.35%
UK FTSE (cash) 5847 7 0.12%
German DAX (cash) 6954 6 0.09%
Japan 225 (cash) 8948 23 0.25%
Rio Tinto Plc (London) 30.38 -1.52 -4.77%
BHP Billiton Plc (London) 19.38 -0.44 -2.22%
BHP Billiton Ltd. ADR (US) (AUD) 32.47 -0.15 -0.47%
US Light Crude Oil (September) 94.34 1.08 1.15%
Gold (spot) 1603.6 1.2 0.07%
Aluminium (London) 1839 -22 -1.18%
Copper (London) 7400 -42 -0.57%
Nickel (London) 15311 -178 -1.15%
Zinc (London) 1830 -31 -1.65%


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