IG Markets - Morning Thoughts

IG Markets - Morning Thoughts

Last week, the ASX snapped a four-week losing streak after having the largest one-day rally in 18 months on Friday.

Friday’s bounce came on the back of the market completely correcting this year’s gains during Thursday’s trading session. The 11% correction the ASX has now experienced has left it in a very precarious position.

It will either continue to bounce off Thursday’s low, or last week was a dead cat bounce, and the global mood change to gloom will continue to see the ASX sliding down the Matterhorn.

There are several key events this week that will govern the direction the ASX. The first piece of the puzzle is released tomorrow with the publication of the RBA’s monetary policy statement. Several major investment banks have and been calling for another rate cut before the Federal election. The issue with this call is that after the July meeting there will be six weeks till the September 14 election date. That will wipe out any chance of a cut in August or September. This means it’s now or never, (post-September), for the cut.

The interesting thing is that the fall in the AUD has in part triggered the sell-off in the ASX, as the repatriation of funds saw the volume-values in the banks hit all-time highs. So if the statement has any suggestion of a rate cut for the July meeting, the AUD should slide further and this may in turn drag the ASX with it – making the bounce short lived.

The other more important piece of the puzzle comes at 4:00am Thursday ASET with the FOMC economic projections, statement and press conference. This will give us the clearest picture of the state of the US economy according to the Fed.

The most likely outcome is the Fed will reconfirm that unemployment remains stubbornly high, several key indictors continue to fluctuate, and the US economy is still not holding its own. All this should see the Fed holding the line on the $85 billion stimulus programme, with tapering to be reassessed in three to four months.

The stability this statement will provide for the currency and equity markets should give the ASX clear air to consolidate Friday’s gains. We have alluded to the fact that the last three winters have seen the ASX correcting hard before bouncing up over the corresponding three months; each time there was a major macro statement acting as a catalyst. We see the FOMC economic projections as this year’s possible catalyst for a winter rally.

However, this is all happening later in the week, and ahead of the open today, we are calling the ASX 200 down 27 points to 4764 (-0.7%). BHP’s ADR is suggesting the security will be flat holding at $32.91, however volumes in the lead indictor are low and may not be actuate. The iron ore price did move up over the weekend to $113.60, however the concern for the resource plays is the put call spread on the listed Chinese index in the US hit its widest margin since September last year, as investors bet against the Chinese market. Not so good news.

So, was last week a dead cat bounce or triggering bounce? By the end of Friday this week we should know the answer.

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

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