IG's Trading Wrap

IG's Trading Wrap

We are not paying a huge amount of attention to the ten-point fall in the SPI on Friday as this would provide a poor indication of where the ASX 200 will open. US futures re-open at 10:00 (AEDT) and they should get a descent boost, lead largely on a perception of a much stronger Nikkei, which opens an hour later.

USD/JPY and the JPY crosses have been on a tear of late, led largely on the belief of political change and the prospect of more radical action from the BoJ when current leader Mr Shirakawa steps down in early April. Most had expected the LDP party and coalition ally New Komeito to poll very well. However, it was always hit or miss as to whether they would achieve the 320 seats (out of 480) to gain a ‘super majority’, thus providing the advantage to pass bills voted down by the upper house. This has transpired and the LDP/New Komeito have pulled well over 320 seats needed for this majority. The combination of a new political regime that has committed to a 3% inflation target, while also having a strong say in who replaces the conservative BoJ governor is significantly JPY-bearish, and in early inter-bank trade USD/JPY rallied to 84.48 (from 83.52 on Friday close), above the March 15 pivot of 84.18 and now targets 85.53 (April 2011 high). AUD/JPY and the other crosses have made a significant gain on the open and one wonders how much higher they would be if it wasn’t for talk in local publications that the BoJ will hold off from easing in Thursday’s central bank meeting. Traders now wait for pullbacks in these pairs for buying opportunities.

The Shanghai Composite will also be in focus when it starts the new week at 12:30 (AEDT) and it will be interesting to see how local traders and investors interpret the rhetoric seen at the Chinese annual meeting. Momentum is clearly with the index after its strong 4.3% rally on Friday. However, the fact that AUD/USD has found sellers on the open could indicate the index faces headwinds after local publications suggested leaders may accept a reduced pace of expansion. The lack of economic targets set by the PBOC has been a reason touted by many as a minor concern; though we feel the fact authorities are targeting ‘quality’ growth as opposed to quantity is prudent and should be celebrated.

The S&P may have fallen 0.4% on Friday, but the news over the weekend was that House Speaker John Boehner has offered to raise income tax on households earning more than $1 million, which would be in exchange for cuts in entitlement spending. While this concession won’t see the light of day, it is a small but highly constructive step in negotiations as the Republicans have been loath to raise taxes on the wealthy. It also shows the divergence in what is considered ‘wealthy’, with the Democrats looking towards those who earn $250,000.

So all-in-all the small fall the SPI is indicating should largely be overlooked given the Japanese elections, Republican concessions and Chinese news. The currency market is the only asset class open at this time, and while AUD/USD is lower (which usually indicates that equities could struggle), the JPY weakness should support the Nikkei, which in turn should support the ASX 200.

Iron ore gained a further 2.2% to $129.4 per tonne and names like FMG should do well on the open, with Fortescue targeting the June highs of $4.58. As with our ASX 200 calls, most other commodities are relatively flat from the 16:00 (AEDT) equity cash close, but will be impacted by weekend developments. So, as things stand, it is clear names like BHP and RIO have good momentum and should find support today.

It is also worth highlighting that liquidity dries up from today, so we may see some slightly more erratic moves. Last year during this time the ASX 200 averaged just over A$4 billion in seven days, which isn’t terrible, so if we see value around that figure, it would be positive.
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