IG Markets - Morning Thoughts

IG Markets - Morning Thoughts

Two major pieces of data were released in the US last night, and both disappointed and sank global markets.

ADP non-farm employment changes and non-manufacturing PMI data not only disappointed but in the case of non-farms, severely disappointed. The ADP fell to 158,000 new jobs added, versus a forecasted 203,000 and last month’s print of 237,000 - that’s a 22% miss.

Since the S&P and the Dow both printed all-time closing highs yesterday, this was all the push traders and investors needed to cash in profits, sending the indices into a short, sharp sell-off.

There is a silver lining to the ADP data that isn’t mentioned in the headlines. FOMC member Charles Evans is a well-known dove and a voting member on the board, and had said he was looking for an average of 200,000 jobs added over a six-month period before he would change his opinion. We did see him speak yesterday, stating that he now expects 3.5% growth in the US in 2014, and that employment is moving at a faster pace than expected. If Friday’s official figures come out in-line with the ADP numbers from last night, his tone may revert to his previous dovish position and the liquidity taps should remain firmly on in the interim.

The other bad piece of data for the Aussie market was crude oil inventories shot up to 2.7 million barrels of oil, well above the forecasted 1.8 million. This sent world oil prices into a dive, and crude had its largest intra-day fall in over four months - down 2.8%.

This will make motorists happy in three weeks’ time when the price filters through to the bowser. However, it is not going to make energy investors very happy considering the likes of Santos and Origin Energy are both coming into a high capex cycle as they ramp up construction of their respective LNG projects. They are also in the sights of the Greens, which want to retrospectively close projects on environmental issues.

The knockout blow for today’s trade is again the tension on the Korean Peninsula. Last night the US stepped up its defences in Guam and reiterated its support of its allies, its right to defend itself and its people. The UN is so concerned that Secretary General Ban Ki-Moon (a South Korean national) now fears all-out war, as both sides push the envelope.

The key currency today will be USD/JPY. Today sees the end of the two-day BoJ meeting and the announcement of its cash rate and monetary statement. The BoJ press statement which should come out in the afternoon (although there is no set time) will be the biggest mover of the currency and the Nikkei. Expect price action to be choppy ahead of that, with most strategists suggesting we could see a ‘sell the news’ scenario play out. There are many different policies the bank will have to deploy, but we note that recent commentary from respected publications are not painting a very positive picture, especially on the level of additional asset purchases it will announce.

EUR/AUD is the other pair to watch today, as we look for it to test the recent low of $1.222. Australian retail sale figures are expected to jump up 0.3%, while building approvals are anticipated to excel by adding 2.5% and should push the Aussie dollar higher. Later tonight is the ECB press conference, and after several weeks of turmoil, watch for easing and dovish sentiment from Mr Mario Draghi which will push the EUR lower, and this pair lower again.

The news from last night saw commodities drop like a stone with copper off 1.4%, nickel down 1.62% and silver sinking 1.7%. Taking a look at silver’s chart, and it appears to be in an almost perfect bear market. Gold is faring even worse, with June futures falling 1.4% to a settlement price of $1553.50, that is an 18% decline since the high of $1891 back in August last year, and is now only 2% off the 20% benchmark for an official bear market. Newcrest and the like are in for another day of riding the elevator.

Looking at the open, we are calling the ASX 200 down 41 points to 4917 (-0.83%) as we follow global leads lower. I have already laid out the plight of commodities, and expect a strong pull back from the material and energy sectors. BHP’s ADR is pointing lower, down 39 cents to $31.84, and may find itself only $1.34 from the major support level of $30.50 from June last year; this is a concerning development.

But what is even more worrying today for our financially heavy market is the fact that US and European financial spaces were the leading drags on their respective markets. If the banks fall like they did yesterday, coupled with the expected drop in the materials, we are in for a very hard and sharp pull back, despite the fact $14.2 billion worth of dividends are coming back into the market over the next two weeks.
Market Price at 7:00am AEST Change Since Australian Market Close Percentage Change
AUD/USD 1.0457 -0.0000 0.00%
ASX (cash) 4917 -41 -0.83%
US DOW (cash) 14550 -112 -0.76%
US S&P (cash) 1552.1 -16.8 -1.07%
UK FTSE (cash) 6395 -78 -1.21%
German DAX (cash) 7867 -56 -0.70%
Japan 225 (cash) 12165 -140 -1.13%
Rio Tinto Plc (London) 30.24 -0.61 -1.97%
BHP Billiton Plc (London) 19.00 -0.40 -2.06%
BHP Billiton Ltd. ADR (US) (AUD) 31.84 -0.39 -1.20%
US Light Crude Oil (May) 94.39 -2.30 -2.37%
Gold (spot) 1558.05 -10.1 -0.65%
Aluminium (London) 1871 -12 -0.64%
Copper (London) 7376 -105 -1.41%
Nickel (London) 16038 -264 -1.62%
Zinc (London) 2050 -4 -0.18%
Iron Ore 135.60 -0.5 -0.37%

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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