IG Markets - Afternoon Thoughts

IG Markets - Afternoon Thoughts

There’s been an underlying negative tone in Asia today, despite a positive US and European lead, and strength in Japanese equities. We put this down to Fed chatter more than anything else, although the 5.3% drop on the month for HIA Australian home sales certainly didn’t help the Australian banks in any shape or form.

Last night we heard from Minneapolis Fed President Narayana Kocherlakota arguing that the Fed’s policy was not accommodative enough. Clearly, this was seen as dovish, while Atlanta Fed President Dennis Lockhart’s comments were also considered dovish when he spoke about keeping asset purchases through to 2014. If you dig a little deeper into his comments however, he mentioned the ‘decision to curtail the pace of asset purchases ought to be forward looking and, in my judgment, that point could come later this year or early next year.’ Dennis Lockhart is not a voting member; however these comments could be key.

Comments today from the Chicago President Charles Evans seemed to correlate nicely with Dennis Lockhart’s forward looking stance. Mr Evans, who only last week provided fairly dovish rhetoric to the market (which would not surprise anyone given his long running stance), seemed to be the catalyst behind a pick-up in volatility today. What we did find interesting was his above-consensus view of 2.5% growth this year (despite the current fiscal drag), and 3.5% growth next year. He went on to say that at some point the Fed will reduce the pace of bond buying, and that could be later this year. We find this interesting, not just because of how influential Charles Evans has been in the past, but because he has also recently talked about payrolls being a trigger for reducing the pace, if they averaged over 200,000 in a six-month period. The market expecting 205,000 payrolls this Friday, and if you add this to the previous five months, the average would actually be 214,000 –thus the economy, at least in terms of jobs, is tracking above certain Fed expectations.

Certainly these comments, alongside some further hawkish narrative from Richmond Fed President Jeffery Lacker saw gold drop from $1577 to $1563, and USD/JPY rally from 93.32 to 93.69. Gold traders will be watching the February 21 low of $1555 with intent, and a break here would potentially put the December 2011 low of $1522 into the mix.

Clearly the USD/JPY gain helped the Nikkei trade, which was strong from the beginning, despite yesterday’s sell-off and concerns the BoJ won’t hit the mark tomorrow. The ASX 200 lost ground and the size of the move has certainly dumfounded a few market participants, and to be fair, this market has got more attention from our traders (globally) than any other asset class today. With the weighing the banks have and the lofty valuations, it’s probably no surprise to see the sector down 0.8%, with some decent reversals in the different names from a positive open. Material stocks have reacted as well, and while the Chinese market is up 0.2% on the day, rebar futures are ok, and copper is basically unchanged. It could be said Charles Evans’ comments may be having an effect on sentiment; after all, this is a market that craves stimulus. Perhaps the developments between North and South Korea haven’t helped, and although USD/KRW is at the highest level since September 2012, the Kospi is only down a touch.

European markets look like they will find sellers on the open, testament to the S&P futures falling 0.2% from the European cash close and FTSE futures losing 0.3%. Client activity, has been centred on the ASX 200 and resource names, so it will be interesting to see how traders react on the open, given most were in a boisterous mood yesterday. We highlighted the bearish set-up in cable yesterday, and the pair went on to stage a nasty reversal, continuing through 1.51 today, while EUR/GBP looks set to test .8500. Construction PMI is on the docket today, with analysts expecting a mild improvement in the pace of construction. Eurozone flash CPI could also be in focus and would give the further ECB licence in the near term.

In the US, we hear from St Louis President James Bullard (currently a voting member) and San Francisco President John Williams (a non-voter). Again, we will pay more attention to the voting member, although we will point out that both sit at opposing views of the hawkish/dovish divide, and both stances are well known.

Given the significance of Friday’s US payrolls report, the upcoming ADP private sector payrolls will be of interest as well. The market is expecting a modest increase of 200,000 jobs, so a strong number could see a few houses racketing up their forecasts. Currency traders may also be keen on Norwegian PMI, which is expected to modestly improve to 49.0 from 48.3, while the unemployment rate should stay at a low 3.6%. NOK/SEK has been smashed in recent months as the Norges bank pushes back on rate hike expectations and Swedish data has shown improvement. Good numbers however may be enough to see the pair push back above resistance at 1.1221 (the March 14 high).

Ahead of the open we are calling the FTSE 6469 -21, DAX 7917 -26, CAC 3782 -23, IBEX 7982 -68 and MIB 15450 – 105

www.igmarkets.com

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