IG Markets - Morning Thoughts

IG Markets - Morning Thoughts

Overnight, bottom-up views returned to traders’ minds after the US suffered its worst day of the year with the S&P dropping 2.3% . This occurred while gold found support at the 1350 level as central banks and major investment houses publicly stated that the current price is a buying opportunity.

This is unsurprising considering the plunge gold has experienced over the past 48 hours; it is now at a level not seen since February 2011 and has well and truly broken the bull run of the last nine years. However, the gold bulls have started to arc up over the last 48 hours as they find little pieces of data to suggest gold has experienced a glitch, and will reverse.

I have no doubt that gold will return to higher levels in the future - inflation looks like being the winner over deflation on a medium- to longer-term view, as the three major central banks expand their balance sheets. However, on a short to interim view, it is still in a bear market, and with the US dollar becoming an investment currency, and markets starting to show signs of investment pick-up, a value-store is not a place most traders will find attractive.

I will highlight the plight of NCM again today. Yesterday was a very interesting day for believers versus non-believers of NCM. It fell straight through the October 2008 low of $16.45 to $16.35, leading investors scrambling to find the next low, which was $16.16 in June 2006 as gold continued to drop. From the $16.35 pivot, believers took over and NCM bounced hard off the lows to close above its ADR call at $17.00. I would expect that bounce to continue today; NCM has lost 31.36% since the February 11 high, and 22.76% since the rout started on March 28.

I have called NCM a value trap before, and I will do it again. Its half-year update highlighted the fact that production costs had reached A$1,031 an ounce with a cash cost at A$727 an ounce. This did not include the production downgrade from March 28, which means cost will have risen again. Be very careful how you structure your trades here.

What was exciting to see yesterday was BHP’s performance. It looked to be heading in the same direction as gold and copper stocks, straight to the July 2012 lows. I have stated before that $31.41 is the level most traders see as a major support pivot for BHP, as both the technicals and fundamentals line up. Price-to-earnings ratios dropped 10 times across the investment house; the technical strength at $31 is also a glaring buying opportunity and yesterday was no different. BHP was picked up in droves, rallying back above $32 ahead of its production number at 8:30am AEST today. This is the second time this year BHP has bounced off this level. The question now is whether it will test it again or finally head back to the high $30s as CEO Andrew Mackenzie takes the reins in earnest over the coming months.

Ahead of the open, we are calling the ASX 200 up 30 points to 4981 (0.61%) as investors cash in on the volatility of the last few days. BHP’s ADR is looking like it will drop slightly on the open, down eight cents to $32.07; however, momentum and its Q3 production report may drag it higher today. The banks and other defensives also look like being back on the front foot today with the income plays enticing the Japanese carry trade. AUD/JPY jumped back above parity to ¥101.45 and could see Japanese investors heading for yield. With limited macro news today, stock pickers should be out in force as they pick out the pieces of the last few days; watch value being snapped up.
Market Price at 6:00am AEST Change Since Australian Market Close
Percentage Change
AUD/USD 1.0390 0.0025 0.25%
ASX (cash) 4981 30 0.61%
US DOW (cash) 14741 80 0.55%
US S&P (cash) 1572.3 16.3 1.05%
UK FTSE (cash) 6320 11 0.18%
German DAX (cash) 7702 25 0.33%
Japan 225 (cash) 13323 102 0.77%
Rio Tinto Plc (London) 29.64 -0.09 -0.29%
BHP Billiton Plc (London) 18.42 0.18 0.97%
BHP Billiton Ltd. ADR (US) (AUD) 32.07 -0.08 -0.26%
US Light Crude Oil (May) 88.75 0.80 0.91%
Gold (spot) 1369.20 6.2 0.45%
Aluminium (London) 1924 48 2.55%
Copper (London) 7317 98 1.36%
Nickel (London) 15770 75 0.47%
Zinc (London) 2078 28 1.36%
Iron Ore 139.40 -1.5 -1.06%

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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