IG Markets - Morning Thoughts

IG Markets - Morning Thoughts

Once more, volatility in the Asian region is running supreme.

The Nikkei continues to dance like a puppet on strings, as questions regarding the strength and validity of its bond market ramps up.

Governor Kuroda himself suggested that rates will rise and so they should if he is to achieve his 2% inflation target, as rates below inflation would be an even bigger concern. He also stated in the same speech that Japanese banks can handle yield at 3%, but it will mean the BoJ will have to support the market all the way up if it is going to have faith in its ambitious plans.

This news has halted the meteoric rise in USD/JPY, and the correction with the Nikkei has continued. The pair is now back at ¥101, having touched a five-year high of ¥103.73 on Thursday, and the sell-off in the pair has transferred straight into the index.

The volatility in Japan is filtering through to the ASX. The market has lost 289 points or 5.47% in seven days, seeing the local VIX (volatility) index jumping to 17.89. AUD/USD continues to be a source of pain for the market, as the slide in the AUD has corresponded with falls in defensives, not cyclicals, and suggests foreign investors continue to shed their Aussie investments for ones in their own countries, or elsewhere.

The battle is brewing – international investors taking profit, versus yield hunters. With RBA rates at all-time lows, net yields of 5% to 7% are become very attractive. Yields at these levels over the last seven months have been snapped out without blinking. The question we continue to hear is when will this happen?

Having a look at the bigger end of town, WBC has lost over 13% since its recent high, ANZ the same amount, NAB has dropped 9.1% since its recent high, however the stock is turning ex-dividend on Thursday for a fully-franked dividend of 93 cents. Take the div out, and NAB is off 11.8%.

This makes for very attractive income metrics, however as discussed before, at recent highs, Aussie banks collectively were worth $400 billion, though we are not sure if this is a true value of the Aussie banks.

We believe Aussie banks are some of the best run banks in the world, with quality tier-one assets, but the questions come in the underlying economy. For the likes of CBA and WBC, their exposure to the residential housing market does make them look expensive, and this is why battle lines are being drawn.

With the ASX in a strong correction, we wait with baited breath to see if the very strong support seen at 4900 points will hold. Three times the market has touched this level and has subsequently rallied every time. The last time the market reached 4900 it jumped 274 points and the time before that 130 points; with it off 289 points this time around, will we double-back on ourselves if we hit 4900?

Ahead of the open, we are calling the ASX 200 down 14 points to 4945 (-0.28%). We see the defensive stocks battle as the place to watch again today, as the international investors reassess their positioning heading into the first trading day of the week for both the US and UK.
BHP’s ADR market was shut last night, with the close of US markets, however iron ore fell again last night to US$120.90 a tonne to a new year-to-date low. A correction in BHP could be on the cards as concerns about earnings flare. We however believe this may be overdone, as the year-to-date average for iron ore is actually $139 a tonne.

The volatility in the market is not a bad thing; it does show robust trading is taking place and is presenting entry opportunities. Watch for further slides in yield-plays - the more they fall, the bigger the support.

Market Price at 6:00am AEST Change Since Australian Market Close Percentage Change
AUD/USD 0.9638 0.0002 0.02%
USD/JPY 101.0500 0.0700 0.07%
ASX (cash) 4946 -14 -0.28%
US DOW (cash) 15343 14 0.09%
US S&P (cash) 1656.4 1.4 0.08%
UK FTSE (cash) 6691 7 0.10%
German DAX (cash) 8388 51 0.61%
Japan 225 (cash) 13920 -223 -1.58%
Rio Tinto Plc (London) Closed - -
BHP Billiton Plc (London) Closed - -
BHP Billiton Ltd. ADR (US) (AUD) Closed - -
US Light Crude Oil (June) 93.65 0.09 0.10%
Gold (spot) 1394.78 2.3 0.17%
Aluminium (London) 1840 0 0.00%
Copper (London) 7282 0 0.00%
Nickel (London) 14794 0 0.00%
Zinc (London) 1855 0 0.00%
Iron Ore 120.9 -2.3 -1.87%

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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