IG Markets - Morning Thoughts

IG Markets - Morning Thoughts

On Friday night, the S&P 500 pushed itself back on the winners list after suffering two straight days of losses. It jumped 1% on Friday and finished the week up 0.7% to 1513 points, making it the fifth straight up week for the index. A better-than-expected labour market, plus earnings that continue to top estimates saw the S&P continue on its way towards record highs. With the futures market showing a 1% rise since 4pm (AEST) on Friday and positive finishes to global markets on Friday night, the ASX 200 is set for another good start to a week.

The market has now risen 934 points since its low in June last year, which sees it up 23.43% on the closing price on Friday. We are now up 273 points for the year (a 5.8% gain) and eleven of the last twelve days have been positive. This all points to some very strong history trends - of the 18 times since 1970 that the market had a positive January, it has gone on to finish the year with a growth average of nearly 19%. In some instances, the market rose up as much as 26% and if we take a look at the current financial year, we are not far off that 26% growth mark. With the wall of worry starting to come down brick-by-brick and with massive amount of funds still sitting in safe-haven assets, the fear of missing out is now staring investors right in the face. However, all this excitement gives us a reason to pause on a very short-term view.

This week is massive for local economic data. Today sees the release of building approvals data with forecasts predicting only a 1.1% rise. A disappointing result here will reiterate the sluggishness of the underlying economy. On Wednesday, December retail sales are released (which will illustrate Christmas spending) and on Thursday we get unemployment data, which is expected to rise, giving us a reason to pause.

The major news for this week, however, will come tomorrow with the release of Australia’s trade balance and the first official interest rate figures for 2013. We do not expect movement here and believe the official rates will hold at 3% for February, but what we are interested in is the language used. RBA Governor Glenn Stevens is one of the best poker players around and will hold his cards very close to his chest, however if we see any sign of dovish views in his press release, this may be all the market needs to have a slight correction.

We have made it very clear that we see the ASX making its way to 4986 points in the short to medium term (a 50% retracement of the 2007 high and the GFC low of 2009). That is now only 3% away at current levels, and with all indicators pointing to a rise of 0.3% today that resistance level comes into sharper focus. If the market can ignore local factors and continue to look at company fundamentals and global leads (which it has started to do; we note that macro-noise correlations are continuing to breaking down), we could very well punch through this level and follow the trends of the last forty years and see the ASX enter a fantastic bull market.

Moving to the open, we are calling the ASX 200 up 0.3% to 4937 points as it follows the leads from the US and European markets. We are expecting to see BHP continue to move up strongly this morning, with its ADR pointing up 0.60% to $38.15, and should see it lead the materials space higher as well. This week sees the start of the financials reporting with NAB opening its books on Thursday; a better-than-expected earnings report this week could see it finally move up on its peers as it currently trades at discount. With February off to a positive start, let’s hope local data can come in line with forecasts and thus continue to support the upward trend.

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