IG Markets - Morning Thoughts

IG Markets - Morning Thoughts

Overnight, US markets posted modest gains as political posturing over the fiscal cliff was once again on full display. Stocks did however finish well off their highs after Republicans and Democrats continued to fire barbs at each other over the lack of progress towards a deal. What does seem evident is that as stubbornly as Republicans are opposing tax hikes for the wealthiest 2% of Americans, the Democrats are just as stubbornly refusing to offer up any real spending/entitlements cuts – hence the current stalemate.

Earlier in the session, Republican House Leader John Boehner accused President Obama of dragging his feet on budget talks, but said he was still hopeful of a deal by year-end. Harry Reid, the Democrats Senate Majority leader poured cold water on this, saying it would be hard for a deal to be reached by Christmas. Unsurprisingly, the market pared gains on these comments.

Turning to the local market, the ASX 200 is this morning set to post a fresh year high on the open, with the benchmark index called to unwind 17 points or 0.4% firmer at 4593. Yesterday the market hit an intraday high of 4581, just shy of the previous high of 4581.8 reached on 18 October, but the strong performances from European and US equities will see that level comfortably surpassed this morning, with 4600 a very real possibility as some stage today. Gains are again expected to be relatively broad based with another solid performance anticipated from the materials sector. Iron ore prices were once again higher (+1.2% to $124.90) and BHP’s ADR is suggesting BHP’s breakout to the upside will continue with the local stock set to open up 0.3% at $35.71.

Yesterday we saw the NAB business confidence print highlight that 175 basis points of cuts to the cash rate hasn’t increased confidence in business, and today we get to see how the consumer feels with the Westpac consumer confidence read. Last month the metric gained 5.2% and while this data print doesn’t usually spur too much volatility in the AUD, we feel the market will be keen to see a good number today. With AUD/USD and AUD/JPY breaking out, it will be interesting to see how the bears act given the barrage of resistance seen in the short term. Firstly, AUD/USD will need to clear 1.0562 – the downtrend drawn from the post float high of 1.1081 - where a break here should see the top of the recent range come into play at 1.0625. Momentum indicators are positive, suggesting pullbacks will be bought.

Clearly the ‘fiscal cliff’ remains front and centre, but tonight (04:30 AEDT) the Fed is expected to announce the QE4, or effectively $45 billion a month buying of US treasuries to replace its expiring ‘Operation Twist’. This will then co-exist with its current $40 billion a month of mortgage-backed security buying. In theory there shouldn’t be a huge reaction to news that the Fed is initiating this programme given it has been speculated on for some time and should be priced in. Look for a sizeable negative reaction if the Fed either does a smaller size or delays the programme until the New Year.

Market Price at 8:00am AEST Change Since Australian Market Close Percentage Change
AUD/USD 1.0525 0.0043 0.42%
ASX (cash) 4595 19 0.42%
US DOW (cash) 13263 91 0.69%
US S&P (cash) 1433.6 12.3 0.86%
UK FTSE (cash) 5931 8 0.14%
German DAX (cash) 7596 54 0.72%
Japan 225 (cash) 9578 63 0.66%
Rio Tinto Plc (London) 33.08 0.31 0.94%
BHP Billiton Plc (London) 20.55 0.33 1.62%
BHP Billiton Ltd. ADR (US) (AUD) 35.70 0.29 0.81%
US Light Crude Oil (January) 85.89 0.28 0.32%
Gold (spot) 1710.00 0.8 0.05%
Aluminium (London) 2111.5 -14 -0.65%
Copper (London) 8090 -26 -0.32%
Nickel (London) 17782.5 37 0.21%
Zinc (London) 2292 -1 -0.05%
Iron Ore 124.9 1.50 1.22%

www.igmarkets.com

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