IG Markets - Morning Thoughts

IG Markets - Morning Thoughts

AUD/USD found itself losing further ground overnight, as investors digested the Budget, while the USD continued to power ahead on optimism that the US economy is picking up.

The pair found itself at $0.989 as forward estimates see the budget toiling back to surplus.

The forward estimates are projecting a return to surplus in 2016 to 2017. This means an extended period of fiscal consolidation, adding pressure on the RBA’s monetary policy to have an extended period of low rates as the economy adjusts to mining investment no longer being the major driver of growth. This will see the AUD holding below parity, which should ease the pressure from future budgets and company bottom-lines denoted in USD dollars.

On a more stock-specific view, it’s hard to see any major responses from the budget. The announced $24 billion infrastructure projects may see positive reactions for the likes of Lend Lease, Downer EDI, Leighton, Transurban and UGL, as the government looks to improve major transport infrastructure with Melbourne’s Metro rail and Sydney’s WestConnex motorway in its sights.

On a possible downside, the government has introduced a tax on tax-free superannuation earnings of $100,000 or more. The rate will revert to the standard 15% once this figure is triggered. The effect on the market should be minor, however stocks like AMP (the largest provider of Self-Managed Super Funds (SMSF) in this country), MQG and even CBA and ANZ may experience some bumps on this new tax.

The most interesting outcome from the budget is that it should be ‘situation normal’ for the ASX; if anything, the falling AUD will have a slight benefit. Cyclical stocks are due for a bounce and the AUD below parity may be the spark needed (coupled with capital management).

Overnight, BHP’s new CEO Andrew Mackenzie delivered a speech in Barcelona that capital and exploration spending will peak at $22 billion before declining ‘significantly’ to $18 billion in 2014, as long-dated projects turnover into production phase. ‘The rate of spending is expected to decline significantly thereafter to $15 billion and perhaps even less,’ Mr Mackenzie said before adding ‘that if we cannot meet our investment criteria, capital will be redirect elsewhere or we will not invest.’ This sparked optimism that the world’s largest mining company may finally return cash to shareholders, similar to what WPL has done. This will cause ears to prick up, and does reiterate what most expected with the appointment of Mr Mackenzie – that he would be more investor-friendly than his predecessor.

Ahead of the open, we are calling the ASX 200 up 29 points to 5250 (+0.55%).The positive call follows the leads from the US and Europe and the fact the AUD continues to slide.

Capital goods, health care and financial services could go on a tear, with the dollar falling and will raise earnings optimism for the second half if stays underwater. BHP’s ADR is suggesting the security will drop 16 cents today to $34.51 (-0.46%), however on the back of Mr Mackenzie’s speech, this may be short-lived as investors look for the next spark for cyclical shares.

Gold has fallen back in to bear market territory; at $1425 an ounce it is teetering on the edge of the 20% loss to make it official. Having being downgraded by the likes of Deutsche Bank, NCM looks like it’s in for more pain with this move.

Market Price at 7:00am AEST Change Since Australian Market Close Percentage Change
AUD/USD 0.9892 -0.0090 -0.90%
ASX (cash) 5250 29 0.55%
US DOW (cash) 15205 100 0.66%
US S&P (cash) 1652.2 15.9 0.97%
UK FTSE (cash) 6696 45 0.68%
German DAX (cash) 8362 62 0.74%
Japan 225 (cash) 15056 298 2.02%
Rio Tinto Plc (London) 29.69 -0.33 -1.08%
BHP Billiton Plc (London) 19.20 0.09 0.46%
BHP Billiton Ltd. ADR (US) (AUD) 34.51 -0.16 -0.46%
US Light Crude Oil (June) 94.23 -1.27 -1.33%
Gold (spot) 1425.20 -17.6 -1.22%
Aluminium (London) 1856 -10 -0.53%
Copper (London) 7244 -108 -1.47%
Nickel (London) 15123 -222 -1.44%
Zinc (London) 1845 -19 -1.04%
Iron Ore 128.10 -1.3 -1.00%

IG Markets provides round-the-clock CFD trading on currencies, indices and commodities. The levels quoted in this email are the latest tradeable price for each market. The net change for each market is referenced from the corresponding tradeable level at yesterday’s close of the ASX. These levels are specifically tailored for the Australian trader and take into account the 24hr nature of global markets.

Please contact IG Markets if you require market commentary or the latest dealing price.

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