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IG Markets - Morning Thoughts

IG Markets - Morning Thoughts

The ASX 200 looks set to round off the month of August on the back foot, with the index expected to open just below 4300. After having been as high as 4403 on August 23, the 2.5% pullback (providing our opening call is correct) is by no means huge, but it is hard to see a re-test of the highs with the clear negative news flow towards resource stocks.

US equities headed lower on the day with the S&P closing down 0.8% at 1399 (the lowest level since August 7); it certainly hasn’t set us up for the most optimistic of days. Some point to US data, however we feel the moves were once again simply positioning ahead of Jackson Hole, with the market in the last few days really pairing back expectations of Ben Bernanke using the conference to give a clear view of easing at the September FOMC meeting. A meeting between the French and Spanish leaders also failed to give any clear indication of strong near-term action from policy makers and once again Mr Hollande has thrown the emphasis on the October 19 EU summit. It is clear that while the market is pairing back expectations of Jackson Hole providing a catalyst for risk assets, they are doing the same with the September 6 ECB meeting.

Comments from Slovak Prime Minister Robert Fico that a eurozone break-up ‘is as equally possible as the alternative’ (effectively saying a eurozone break-up is 50/50), didn’t help sentiment and caused EUR/USD to drop from 1.2561 to 1.2488.

The September calendar is shaping up to be a busy one, and while volatility in both the equity and forex markets has been dreadful, it is perfectly reasonable to think we are going to see this pick up ahead of the FOMC meeting on September 12 to 13, and the German constitutional vote again on September 12. The Troika will be back in Athens as well through September and it really seems clear to us that October will be an absolutely pivotal month for the eurozone. We should know not only the conditions of Spanish assistance by then, but also whether the Spaniards will actually be making the request. We should know whether Greece is going to get an extension on its deficit targets (potentially two extra years) or whether they are shaping up for an early exit from the EMU. Our instincts tell us Greece’s future lies within the EMU and Spain will tap the assistance of the ECB/EFSF/ESM after Germany votes ‘yes’ on the constitutionality of the ESM. Where EUR/USD will be by then will be interesting, but we feel traders could be looking to buy any pullbacks through the first half of September.

Closer to home, iron ore price continue to fall with the spot price now at $88.70 per metric tonne (m/t). Fortescue metals saw good buying off its low ($3.47, lowest since May 2010) yesterday. However there is now talk that the miner has approached twenty banks to seek out $1.5 billion, with some analysts suggesting it may need up to $2.3 billion if the spot price stays around current levels. Fortescue’s CEO Nev Powers comments yesterday that prices should gravitate back to $120 per m/t may have caused some mild positivity, but clearly the bulls will want to see the price stabilise before getting back in with any kind of conviction.

BHP’s ADR is suggesting a lower open to the tune of 1.3%, and today is the last day investors can buy the stock for its 57 cent dividend. Coincidentally, with the heavyweight going ex-dividend on Monday, along with several other companies, 11.26 points will come out of the index (IG Markets will take out at 16:00 AEST today). It is also worth bearing in mind that Chinese manufacturing PMI data is released on Saturday (expected to be 50), so a weak number here and a strong signal that easing is not on the cards in September from Jackson Hole could see local stocks gap lower on Monday.

Market Price at 6:30am AEST Change Since Australian Market Close Percentage Change
AUD/USD 1.0290 -0.0045 -0.43%
ASX (cash) 4296 -20 -0.47%
US DOW (cash) 12989 -70 -0.54%
US S&P (cash) 1400.2 -7.1 -0.51%
UK FTSE (cash) 5710 -16 -0.28%
German DAX (cash) 6890 -84 -1.20%
Japan 225 (cash) 8911 -73 -0.81%
Rio Tinto Plc (London) 27.16 -0.57 -2.06%
BHP Billiton Plc (London) 18.43 -0.62 -3.24%
BHP Billiton Ltd. ADR (US) (AUD) 31.57 -0.42 -1.30%
US Light Crude Oil (October) 94.63 -0.64 -0.67%
Gold (spot) 1655.6 -3.9 -0.23%
Aluminium (London) 1879 -13 -0.67%
Copper (London) 7569 -56 -0.73%
Nickel (London) 16013 -341 -2.09%


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