IG - Afternoon thoughts

Good afternoon,

FTSE 5926 +4
DAX 7624 +28
CAC 3645 +2
IBEX 8046 +22
DOW 13179 +44
NAS 2635 +7
S&P 1419 +5

Oil 86.88
Gold 1692

It has been an interesting start to the week for Asian markets with Japan taking over from China as the main point of focus today. The Nikkei got off to a strong start, jumping 1.6% on the back of the LDP election victory. With a super majority being achieved by the LDP and junior partner New Komeito, the government can be as aggressive as it wants to be. We have already seen some big moves in USD/JPY and yen crosses this morning, as investors respond to the election results. USD/JPY jumped to 84.36 at the open today, leaving a big gap from Saturday’s close of 83.51. The pair has slipped dramatically from the early highs and even dipped below 84 on some profit taking. These gaps tend to be filled, but so far USD/JPY has found support near 83.90 which is around its highs from last week. AUD/JPY and the other yen crosses also made significant gains 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. The conclusion of the election results puts Thursday’s BoJ meeting firmly in focus with some speculating we might see some measures being announced. Traders now wait for pullbacks in these pairs for buying opportunities. Talk of a change in leadership at the BoJ will also ramp up, with current leader Mr Shirakawa stepping down in April next year.

Looking at the equities in the rest of region, the Shanghai Composite (+0.5%) is seeing some follow-through buying after the big rally on Friday on the back of the HSBC manufacturing PMI print. Although there has been a lot of negative talk on the composition of the number, it seems China is prepared to take a number of steps to help improve on this. Some of these measures include lifting the urbanisation rate to 60% by 2020 and relaxing/abolishing a rule that requires foreign institutional investors to keep 80% in onshore bonds. With Chinese markets rallying, we have also seen a further improvement in iron ore prices to around US$129 per tonne. Iron ore was up nearly 6% last week. Ahead of the European open, we are calling the major bourses modestly firmer. Risk appetite was also mildly improved by reports House Speaker John Boehner offered to raise tax on households’ earnings by more than a $1 million a year in exchange for containing the cost of federal entitlement programmes. This issue will probably gain significant attention later in the US session along with the Empire State manufacturing index.

The ASX 200 has gotten off to a relatively flat start to the week, despite some expectations that the developments from the weekend would fuel risk appetite. The materials sector has gained ground with iron ore miners rising after the 2% rally in iron ore prices. BHP and RIO are up around 1% each while FMG has jumped 3.7%. Iluka has bounced back after a woeful performance last week and is currently 1.1% higher. Gold miners are lagging with Newcrest falling 2.7%, Medusa down 4.4% and Kingsgate also lower by 3%. Financials are mildly weaker as investors chase risk plays as opposed to yield plays. ANZ Bank has dropped 0.6% and Commonwealth Bank has shed 0.4%. Elsewhere, Fairfax (FXJ) has jumped 3% after announcing the sale of its remaining 51% stake in Trade Me for $616 million. FXJ will use the funds to pay down its debt and strengthen its balance sheet. Last week we saw a big move through 50 cents in FXJ shares and they traded at a high of 54.5 cents. The stock came just shy of that high today and we wouldn’t be surprised to see it tested in coming sessions. Near-term support is at 50 cents which was previous resistance. Although FXJ’s move to bolster its balance sheet is a positive, some analysts remain concerned that it has sold out of one its best investments.

STAN SHAMU
Market Strategist
www.igmarkets.com

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