IG Markets - Morning Prices June 3

With the ASX losing 313 points from the high on the May 20, giving us the end of one of the worst May months in years, the old adage ‘sell in May, go away’ came true for the Aussie market.

The scale of the sell-off is what also makes last month very interesting. Volumes were well above the 30-day moving average, with the banks taking the biggest hits. But the rotation out of all the defensive plays has been massive; they have been the most supportive part of the ASX in the past, which added to the May carnage.

Telstra has finally seen sustained selling and looks to have reached a peak. Remember TLS was the best performing stock in the ASX 20 for the last two years running, on either metric you use, whether it be straight gains or on an accumulative basis. TLS managed to achieve high double-digit growth in both 2011 and 2012; this change was bound to happen as the yield story got squeezed.

It’s the fall in the banks however that has changed the dynamics of the ASX 200. They have been severe; ANZ, NAB and WBC have all experienced average sell-offs, with values of $6.9 billion in May. All three have shed over 12% in the past few weeks, and the selling looks sustained each time one of them pops its head above the parapet.

This makes June a very interesting prospect. Winter is here and we are asking the question, will it be a winter wonderland for the ASX or a winter north of the wall? We are think it will be a winter wonderland and here is why.

Over the weekend, the official Chinese PMI data came out, and unlike the flash data last Monday, it actually showed China is stabilising and manufacturing is holding above the expansion line. The data showed China expanded in May ( 50.8 from 50.6 in April), and with the flash PMI data making its second revised print this morning, a movement up will make a double positive for China and resources alike.

The other advantages for the ASX is that credit in China is still supportive, as is housing growth. The inventory cycle and the over-supply we have seen is also coming to an end as China holds firm.

This all points to a positive lead for resource stocks, and after Goldman Sachs called a rotation out of defensives and into cyclicals on the basis fundamentals, support (particularly from institutional investors) is coming.

What should also support the ASX in the winter months is that banks have now become buying opportunities again. The volumes that have exited the banks are coming to a point of exhaustion; there is plenty of investors that have been looking for ‘cheap’ points of entry for 12 months as the banks ran away from them. This pull-back will see a lot of retail investors jumping in, chasing the earning streams on offer from the banks.

So we think the ASX is in for a positive winter. Over the last four years, July has registered a positive read every time, and over the three winter months, the ASX has found itself up over this period for the last three years.
The next question is whether the north print will start this week?
AUD-influential data today is everywhere; retails sales figures, ANZ job ads and company operating profits. Tomorrow is the big one with RBA statement and cash rate; the AUD is the currency to watch this week as Chinese and Japanese data will also cause movements, and the currency is a lead indictor for the equity market.
There is also stock-specific macro data that could lead material plays higher as well. This afternoon at 16:30 AEST, the year-on-year commodity prices data print is released. If we see moderate growth it will add support to the idea that second-half earnings could meet expectations and see the ASX having a winter to remember.
However, moving to today and ahead of the open, we are calling the ASX 200 down 53 points to 4874 (-1.07%). This is following on from a very turbulent Friday session in Europe and the US. The sell-off in the banks isn’t over just yet, and could see them sliding further in the interim as overseas investors locking profits.

BHP’s ADR is suggesting the security will drop 85 cents to $34.03 (-2.43%) as investors also lock in profits (BHP actually had a positive May) and start to worry about iron ore price underlying earnings. If BHP manages to hold above the $34 level it will mean it continues to hold onto its gains in the face of selling. Any good print data over the coming weeks will add weight to the rotation call from Goldman Sachs, and could see BHP continuing to reverse the slide it has been in since its first-half earnings figures.
So here’s hoping for a winter wonderland for the ASX.

Market Price at 6:00am AEST Change Since Australian Market Close Percentage Change
AUD/USD 0.9597 -0.0057 -0.59%
USD/JPY 100.5700 -0.2350 -0.23%
ASX (cash) 4874 -53 -1.07%
US DOW (cash) 15125 -212 -1.38%
US S&P (cash) 1632.6 -24.5 -1.48%
UK FTSE (cash) 6550 -94 -1.42%
German DAX (cash) 8317 -72 -0.85%
Japan 225 (cash) 13478 -297 -2.15%
Rio Tinto Plc (London) 28.58 -0.75 -2.57%
BHP Billiton Plc (London) 19.16 -0.28 -1.44%
BHP Billiton Ltd. ADR (US) (AUD) 34.03 -0.85 -2.43%
US Light Crude Oil (June) 91.46 -2.11 -2.26%
Gold (spot) 1389.40 -29.3 -2.06%
Aluminium (London) 1815 -85 -4.48%
Copper (London) 7273 -31 -0.42%
Nickel (London) 14819 -6 -0.04%
Zinc (London) 1922 19 0.98%
Iron Ore 110.4 -1.5 -1.34%

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.

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