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IG Markets - Morning Prices September 12

Behind the modest moves in US equity markets we feel there are some underlying themes that should support risk assets in the coming months.

While the S&P only etched out a 0.3% gain, it seems risk forex continues to find a steady stream of buyers with the USD weak across the board. EUR/USD for the first time since October closed above its 200-day moving average at 1.2832, and statistics show that since July 2008, we have seen strong ensuing rallies after the pair closed above this level for more than four consecutive days,. AUD/USD had its second bullish outside day in four sessions suggesting the path of least resistance is higher and could continue to find buyers in the short-term up to the August 23 high of 1.0545.

The fact that Moody’s said it may cut the US government rating also weighed on the USD. This is very interesting as a lower debt/GDP ratio (which is basically what it wants to see) is going to be a tall order and would significantly impact future US growth. There seems to be a view that Moody’s effectively pre-announced a downgrade to the US debt rating overnight as its demands will not be met. Again, this highlights just how attractive Australia’s AAA-rated bond is right now.

Sentiment around China continues to cause traders to square and reverse positions. Not only did the August new yuan figure come out (released yesterday) well above expectations, but Premier Wen’s comments at the World Economic Forum in Tianjin that China has ample policy room to meet growth goals will certainly aid the AUD and resource bulls. Premier Wen also mentioned there was 100 billion yuan left in the fiscal stability fund to boost growth, so after the recent 150 billion yuan programme, perhaps more will be announced soon. Iron ore prices gaining 4.4% to $100.20 also compliments this short-term positive view.

The German constitutional vote on the ESM takes place at 18:00 (AEST) and clearly from looking at price action on EUR/USD and the German DAX (+1.3%), the market is feeling this should pass. We would echo the market’s sentiment here and would be very surprised to see a ‘no’ vote. The bigger issue will be on what the Court says about further integration steps; will we see new conditions for future bailouts and will Germany cap the level of future involvement? There is every possibility of a ‘pop’ in risk if these conditions are low.

We also get the European commission’s proposal on a single banking union (expected at 22:00 AEST) and the Dutch elections just after. The latest polls show Prime Minister Mark Rutte’s Liberal Party and the Labour Party running neck-and-neck, and the EUR and equity negative event comes if any potential coalition government includes either the far-left (anti austerity) Socialist party or the far-right (anti-euro) Freedom party. The event risk ramps up tonight.

So we go into todays’ Australian equity trading session knowing that sentiment towards China is still fickle, but improving somewhat, and that the overnight event risk is high. Traders may take the view that the ESM vote will be passed with low conditionality, and this could set us up for a good run into the FOMC meeting, where we could also see the Fed announce renewed asset purchases on an unlimited scale. Some say this is priced in given the strong gains seen in equities and risk forex, however given that hedge funds are significantly underperforming the benchmark S&P, we would not want to be caught short if traders chase performance as more macro tail risks are reduced.

However, as it stands we expect the ASX 200 to unwind around 4338, a gain of twelve points. BHP’s ADR is pointing 0.8% higher, and it will be interesting to watch price action on iron ore names after yesterday’s bout of profit taking.

Market Price at 6:30am AEST Change Since Australian Market Close Percentage Change
AUD/USD 1.0432 0.0100 0.97%
ASX (cash) 4338 12 0.27%
US DOW (cash) 13302 78 0.59%
US S&P (cash) 1434.4 6.4 0.45%
UK FTSE (cash) 5781 13 0.23%
German DAX (cash) 7292 111 1.54%
Japan 225 (cash) 8800 -7 -0.08%
Rio Tinto Plc (London) 30.68 -0.01 -0.03%
BHP Billiton Plc (London) 19.18 0.08 0.43%
BHP Billiton Ltd. ADR (US) (AUD) 32.83 0.25 0.76%
US Light Crude Oil (October) 96.96 0.83 0.87%
Gold (spot) 1731.8 3.4 0.20%
Aluminium (London) 2074 29 1.44%
Copper (London) 8089 86 1.07%
Nickel (London) 16787 173 1.04%
Zinc (London) 2126 28 1.35%

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