IG Markets - Morning Thoughts

IG Markets - Morning Thoughts

Overnight, central banks were again the focus of world markets.

Mario Draghi once again reissued his mantra of ‘whatever it takes’. The language was as expected: ‘we remain accommodative and are ready to move immediately on more poor data’.

This saw banking stocks in the States lead the charge on the S&P last night as yield plays took back the stage after being pushed out by cyclicals after Friday’s non-farm payrolls prints. Yield is key in the ever-diminishing world of ‘safe returns’ as bond yields drop out.

This brings us to Australia’s dilemma - today all eyes will be on RBA Governor Glenn Stevens and his board’s rate decision. The money is split almost fifty-fifty (swaps market) on a rate cut, while economist are not as excited with only six out the 28 economist surveyed by Bloomberg believe the cash rate will be shifted down to 2.75%.

So, if we look at the reasoning behind why the economists are steady (and the money is not) is that over the past month data has not moved enough to change the board’s mind. Retail sales have been solid (until yesterday’s print); building approvals have remained soft (and already factored in); inflation is under expectations (which most commentators sight as the main reason the board is free to move); growth is modest (at best) and confidence is still holding. Nothing has changed over April compared to the month of March, which is why most economists believe there will be no change today.

We agree with these themes, however we believe there will be a significant change in the RBA statement. The language should shift from mildly neutral with an easing bias to a dovish view, with easing a real possibility. If a June move is going to happen as every commentator believes the RBA’s 'green shoots’ view (however small that view may be), needs to change. The non-mining sector is still failing to pick up the slack and confidence is sliding back. Without this language change, a June cut may also be a miss. The other measures that may slow the prospect of a cut in June are capex numbers on May 30. A favourite figure of Mr Stevens green shoots here could see the June meeting put a hold on rates as well.

We have noticed that some very interesting rumours and etiquette changes heading to this result. Rumour on the street is that legendary currency speculator George Soros is short AUD heading into the meeting (the money). Westpac CEO Gail Kelly broke the etiquette norm by commenting on the possibility of rate cut by stating the one is needed to ‘boost consumer confidence and assist the handover of the economic growth to the housing sector from mining’.

Her comments do have an ulterior motive, as she is looking to protect WBC’s $1.3 trillion loan book. Victoria and New South Wales (WBC’s biggest housing markets) slowed dramatically over the past year, and if WBC wants to remain the top player in east coast residential property, this has to improve and a cut will help its book.

Ahead of the open, we are calling the ASX 200 up 18 points to 5174 (+0.35%). Japan is back online today after a public holiday, however do not expect volumes to pick up until after 2.30pm AEST. Trade will be very cautious leading up to the RBA meeting.

AUD/USD has eased overnight to be $1.0252; it will shift on the trade balance figures at 11.30am AEST, but not by much as the real move will come at 2.30pm, and the ASX will then follow over the next hour.

Defensive stocks are going to be front and centre, banks particularly, and positioning over the last two trading days has shown that investors will take the shine off yield plays on no change, and this will be amplified today. With WBC and CBA now the largest listing, the market may find itself in negative territory heading into the close.

Risk looks like it will have an interesting day. The trade balance will show commodity exports; a good print here may get the market looking forward to second-half earnings. Iron ore prices have remained stubbornly high over the first half; a good trade print will help ramp up earnings prospects. BHP’s ADR is suggesting the security will add 34 cents today to $33.21 (+1.04%). If BHP can hold above $32.77 over the coming weeks, a technical rally is on the cards and will drag the materials space with it.

Market Price at 7:00am AEST Change Since Australian Market Close Percentage Change
AUD/USD 1.0254 -0.0030 -0.29%
ASX (cash) 5174 18 0.35%
US DOW (cash) 14965 -3 -0.02%
US S&P (cash) 1616.7 4.1 0.26%
UK FTSE (cash) 6537 5 0.08%
German DAX (cash) 8123 -1 -0.01%
Japan 225 (cash) 14177 459 3.35%
Rio Tinto Plc (London) Bank Holiday - -
BHP Billiton Plc (London) Bank Holiday - -
BHP Billiton Ltd. ADR (US) (AUD) 33.21 0.34 1.04%
US Light Crude Oil (June) 95.84 -0.78 -0.81%
Gold (spot) 1469.82 -7.8 -0.53%
Aluminium (London) Bank Holiday - -
Copper (London) Bank Holiday - -
Nickel (London) Bank Holiday - -
Zinc (London) Bank Holiday - -
Iron Ore Bank Holiday - -

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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