IG Markets - Morning Thoughts

IG Markets - Morning Thoughts

Volatility in the global markets continues to spike, as short-sightedness continues to govern trade flows.

Divergences in markets are everywhere; the MOVE index, which is the option projections for swings in US treasuries, surged 62% in May to be effectively 80 points. The VIX index has climbed 40% since May 17, and weird and wonderful things are happening on the cash closes in the US.
Friday saw 100,000 futures contracts pass hands in the last minute, which was the largest non-quarter end to a month since November 2008 on basically no news. Last night the S&P 500 rallied 50 basis points inside the last hour, just because tomorrow is Tuesday. Why is this? The S&P has rallied every Tuesday for the last 20 weeks; the bet is on for it to make that 21 Tuesdays.

The ASX on the other hand continues to lose out; 326 points have been shed since the market high on May 20 as the index slid all the way into the close.

Yesterday was a very interesting session. The market looked like it would find support at the 4900 level, and it did bounce off here at lunch time as yield-support kicked in led by the banks (who were the stand-outs).

However, as the Nikkei slid in the afternoon, so did the ASX. Year-to-date, the Japanese has actually been net sellers of the ASX. Up to the month of March it had shed US$16 billion in Australian equities, and this has no doubt continued with AUD/JPY sliding 8.84% since the high in April, which means Japanese investors are continuing to dump out of the AUD, locking Aussie equity profits and heading home.

So the winter wonderland we described yesterday has been put on hold in the interim. It’s not surprising considering another two major Australian companies had significant profit downgrades yesterday; TPI and COH lost double-digit percentages.

Cochlear dropped $11.66 yesterday - that’s 18% on the back of a second downgrade inside five months. The sell-off looks well and truly overdone; if it falls further on the open, watch the bargain hunters come running around lunch time today. This is a good company, however the sluggish uptake in the US is making cash flow and earnings viscous. The release of the Nucleus 6 cannot come fast enough for COH.

So what to expect today? The RBA rates decision looks like a non-event; one out 25 economist are expecting a rate cut, and the fact that the AUD is below parity against the JPY and USD, is acting as a further cut.

It will most like mean that AUD/USD will move higher on the decision and the current short-sightedness of the markets could punish the ASX further, as stimulus for the Australian market falls away.

A counter to this is another inflationary measure coming out of Japan today, with the release of average cash earnings (wage growth). The market is expecting wages to inflate (wages are the purest measure of inflation) at 0.6% from -0.9% last year. This will added further weight to Abenomics and the BoJ’s stimulus plan, and could see the Nikkei reverting possible losses the futures are suggesting it will experience.

Ahead of the open, we are calling the ASX 200 down 16 points to 487 (-0.33%). The futures call is mostly based on the fact Japan is pointing lower and the prospect of no rate cut at 14:30 AEST. What could override the futures calls are commodities.

Last night iron ore snapped a six-trading-day losing streak to pop up slightly to US$111.90 a tonne; this has filtered through to BHP’s ADR, with the deposit receipts suggesting the security will add 10 cents to $34.19 (+0.3%), after sliding yesterday. What should also support BHP and the materials and energy sectors today is the fact that industrial metals and oil climbed overnight as stimulus bets from the Fed advanced.

So, will the market find support just below the 4900 mark this morning? The fundamental argument suggests it should; will the market follow suit?

Market Price at 6:00am AEST Change Since Australian Market Close Percentage Change
AUD/USD 0.9770 0.0136 1.41%
USD/JPY 99.4600 -0.9450 -0.94%
ASX (cash) 4872 -16 -0.33%
US DOW (cash) 15229 78 0.51%
US S&P (cash) 1639.7 3.9 0.24%
UK FTSE (cash) 6549 6 0.09%
German DAX (cash) 8325 26 0.31%
Japan 225 (cash) 13168 -94 -0.71%
Rio Tinto Plc (London) 28.81 0.23 0.82%
BHP Billiton Plc (London) 19.03 -0.13 -0.67%
BHP Billiton Ltd. ADR (US) (AUD) 34.19 0.10 0.30%
US Light Crude Oil (June) 93.39 1.69 1.84%
Gold (spot) 1411.60 16.2 1.16%
Aluminium (London) 1923 17 0.89%
Copper (London) 7349 8 0.11%
Nickel (London) 15165 302 2.03%
Zinc (London) 1947 26 1.37%
Iron Ore 111.9 1.5 1.36%

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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