IG Markets - Afternoon Thoughts

IG Markets - Afternoon Thoughts

FTSE 6120 +3
DAX 7691 +16
CAC 3716 +19
IBEX 8635 +34
DOW 13514 -20
NAS 2724 +2
S&P 1470 -2

Oil 93.59
Gold 1682

Asian markets have been mixed today with the Nikkei and Heng Seng both losing ground after recent gains. The while the ASX has bucked the region’s trend to be up 0.4%. Currencies continue to lead equities with the yen rising for a second consecutive day as the over-crowed USD/JPY unwinds. There is increasing speculation that the Bank of Japan will fail to live up to expectations at the January meeting, as investors seeking bold policy initiatives may be disappointed with the outcome. We see further dips here as the yen-bearish trade hits technical resistance at 90. Additional macro pressures will also see USD/JPY unwind further in the short term, as policy makers from all sides of the global fire shots at each other as they each attempt to stimulate their respective region. We would look to buy dips in USD/JPY as the ‘currency wars’ resurface in the coming months, with US ‘debt-ceiling negotiations expected to start in earnest in the coming days. In other Asian news, AUD/USD was stuck in a tight trading band between $1.054 and $1.057, ahead of tomorrow’s official unemployment data. AUD/USD briefly hit $1.058 on the back Westpac’s consumer sentiment which rose to 0.6% in December and was back up by new motor vehicle sales data which advanced 2.2% as the high Aussie dollar saw consumers cash-in on cheaper overseas models.

EUR/USD had its biggest intraday drop since January last year, down 0.9% overnight after Luxembourg Prime Minister Jean-Claude Juncker stated the currency was ‘dangerously’ high and would threaten eurozone growth prospects. Short positions in EUR/USD have unwound over the previous three days, triggered by the press release from ECB President Mario Draghi, and Goldman Sachs putting out a long EUR/USD call at $1.37 on Monday. EUR/USD fell to $1.3263 before rallying back to $1.334 on strongly bid support. There seems to be plenty of bids sitting at 1.325, with EUR/USD jumping up each time it tests this level. EUR/USD is currently holding at $1.3298. The fall in the currency has been taken as a positive in pre-market trading and we are therefore calling the European markets up, led mainly by the DAX.

The local market continues to hold its own, up 0.4% to 4735 points as investors continue to pile back into defensive-yield plays. Blood plasma group CSL rallied 3.06% in some of the thinnest volumes seen in months, while other major yield plays such as Telstra, Woolworths and Wesfarmers all enjoyed positive moves as yield-hunters look to equities as the bond markets yields fall away. The financial sector also enjoyed yield-hunters as CBA, NAB and ANZ all rallied hard on the back of softer bonds markets. The quasi-bond play in CBA is looking incredibly expensive as it heads back towards its all-time high. Watch for switching here, the most likely target seems to be Westpac. In other local news - building and construction materials provider Boral announced a company restructure in an effort to reduce its ‘excessively’ high operating environment. The restructure will see 1000 jobs being shed globally as new CEO Mike Kane searches for profit enhancements. The news was met with strong applause, with BLD rallying 11.24% as productions costs have been a major hurdle for the share price over the previous few months. Mining stocks continue to drag on the local market with RIO shedding 0.8% after it fourth-quarter results didn’t shoot-the-lights-out and investors ‘sold the fact’. As we look to the close, health care, telecommunications and financial sectors are all outperforming the market.

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