IG Markets - Morning Thoughts

IG Markets - Morning Thoughts

Once the Cyprus deal was ratified, the market took this as good news, with most bourses moving up strongly, as did the EUR. Then, in a blink of an eye the head of eurogroup finance Mr Jeroen Dijsselbloem slipped out this sentence, and it was gone:

‘Taking away the risk from the financial sector and taking it on the public shoulders is not the right approach… [if you] take on the risk, you must deal with it, and if you can’t… you shouldn’t have taken it on’. Translation: the eurogroup is going to leave troubled banks to their fate to die a slow and painful death from now on.

He then went on to say, the ‘hard-fought’ deal for Cypriot lenders could become the model and not the exception to dealing with troubled eurozone nations.

This statement alone saw all European markets doing a complete 180-degree turn south. The DAX closed down 0.51%, the CAC lost 1.12%, but it was Madrid and Milan that are the most concerning. The IBEX fell 2.27% and the MIB lost 2.5%, led by losses in the banking sector. The Spanish giant Santander descended 3.24% and BBVA spiralled 3.6% on the contagion fears alone; however, these two banks are well capitalised and well managed. Banksia, the troubled Spanish lender lost 44% on contagion fears, and the fact that it is also being re-capitalised. The story can be replicated in Milan, with Unicredit Spa losing 5.81% after the statements.

Last night we were of the belief that the banking sectors of peripheral markets will be the most interesting, as it is hard not to see how this deal stops the fear of a possible run-on in banks. Risk premiums will increase on this deal, as will market fragmentation; this band-aid deal will have ramifications. This call is now written in stone, and countries such as Slovenia, Italy, Spain and even Greece must be quaking in their boots over this.

The other concern here is that this political issue overflowed into the US, and overtook the fact the S&P got within one point of its record closing print of 1565, before revising all gains and closed down 0.31%.

It wasn’t helped either by comments from Mr William C Dudley. Last night was the first time ‘Fed put’ started to lose its shine as Mr Dudley, one of the core bloc members of the Fed started to suggest the economic outlook was changing, and employment was picking up faster than expected. This statement to the Economic Club in New York prompted fears on the street that the liquidity tap is going to be turned back (not off) sooner rather than later, which saw the sell-off accelerate.

Moving to our region and the most important news coming out of Asia today will be BoJ governor Kuroda’s testimony to the Diet in Tokyo (Japanese parliament). The question is, will he bring the ¥14 trillion stimulus package forward, and look to do more to see Japan returning to two-per cent inflation target? Let’s hope so, as it will push Japanese markets higher.

Looking at the open, we are calling the ASX 200 down 31 points to 4959 (-0.63%), which will mean giving back all gains from yesterday and more. It will be interesting to see the reactions to the banks on the back of what happened in Europe last night. There are two conflicting situations here; one is the fear of a global run-on in the banks, and the other is Australian banks are well capitalised with positive dividend growth, plus three of the four banks are turning ex-dividend inside the next two months. I would expect them to hold firm today.

Leads from the materials space on the other hand look set to be the main drag on our market today. BHP’s ADR is suggesting the stock will lose a further 1.26% down 42 cents to $32.98, as commodity prices tumbled on the Cypriot bailout deal. There is no doubt short-term pain in this space is set to continue.

Market Price at 9:00am AEST Change Since Australian Market Close Percentage Change
AUD/USD 1.0463 0.0012 0.11%
ASX (cash) 4959 -31 -0.63%
US DOW (cash) 14471 -102 -0.70%
US S&P (cash) 1552.4 -9.9 -0.63%
UK FTSE (cash) 6390 -39 -0.60%
German DAX (cash) 7885 -96 -1.21%
Japan 225 (cash) 12457 -111 -0.88%
Rio Tinto Plc (London) 30.70 -0.39 -1.24%
BHP Billiton Plc (London) 19.25 -0.11 -0.59%
BHP Billiton Ltd. ADR (US) (AUD) 32.98 -0.42 -1.26%
US Light Crude Oil (May) 94.62 0.43 0.45%
Gold (spot) 1605.25 -5.5 -0.34%
Aluminium (London) 1932 -23 -1.16%
Copper (London) 7633 -49 -0.64%
Nickel (London) 16940 -227 -1.32%
Zinc (London) 2183 -21 -0.95%
Iron Ore 136.00 0.7 0.52%

IG Markets provides round-the-clock CFD trading on currencies, indices and commodities. The levels quoted in this email are the latest tradeable price for each market. The net change for each market is referenced from the corresponding tradeable level at yesterday’s close of the ASX. These levels are specifically tailored for the Australian trader and take into account the 24hr nature of global markets.

Please contact IG Markets if you require market commentary or the latest dealing price.

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