IG Markets - Morning Thoughts

IG Markets - Morning Thoughts

With the end of the first week of winter what have we learnt?

So far our call that the ASX could see a winter wonderland has been put firmly on hold, as the market has be catapulted miles north of the wall, as horrible macro data muddies the water.

From the looks of the domestic data this week, pessimism is reigning supreme. The GDP figures on Wednesday amplified this pessimism, with some analysts and commentators alike starting to whisper about the dreaded r-word – recession.

There is a sense that Australia could move into recession in early 2014 as the response to the 200 basis-point rate cuts over the last 18 months has seen almost all most no change in the habits of the Australian consumer.

Over the last 18 months, the Australian consumer has moved from a net spender to a net saver - something Australians are not renowned for. It is very understandable why this call is surfacing: wages growth is stalling, the cost of living (particularly in the eastern states) is spiralling out of control as rates and inefficient taxes push spending in the wrong direction, mining is slowing faster than forecasted and the non-mining sector is falling right away (some even suggesting it is in a recession already). It’s all very doom-and-gloom.

However, several events could settle this all down. The election (whichever party wins) will mostly likely produce a majority in the house. Over the last four elections (pre the hung parliament), consumer optimism has moved higher post the election.

We also have a situation where share prices are heading into high support territories. On fundamentals, some are looking cheap, share prices are already low and this has made them a stock-pickers dream, (or nightmare depending were you’re coming from). The white noise coming from macro data is drowning out the fact that bottom-up fundamentals are actually pretty sound. Capital management is also the order of the day right now, and should see additional capital on the balance sheets of these companies, which may find its way back into the hands of shareholders (consumers).

This is another thing that may slow the r-word whispers. Yield support has been thrown out the window over the last six to eight weeks, and you must remember that since July last year (when Mario Draghi’s ‘whatever it takes’ speech hit the wires) yield stocks have been on a tear. If the banks and also Telstra get clear of the international selling, retail buying is poised to head back in.

Retail investors have being screaming out for cheaper entry points to yield, and that is now back on the cards. TLS has fallen 9.5% in the last six week, but has now moved back up as the move seems overdone and yield has hit 7%.

The banks are almost in the same position; buyers are just waiting for the sell volumes to settle down before jumping in. This will mean additional revenue in consumers’ hands, it will also mean passive investment will improve on its own and could lead to increased consumer optimism from the additional funds.

The one thing we haven’t mentioned is that if the RBA feels Australia is moving towards a recession, it still has plenty of room to move on the rates front, increasing the yield support even more as official rates head towards 2% while dividends hit 7% net. That is too tempting not to cash in on.

Ahead of the open, we are calling the ASX 200 dead flat at 4781. The US market popped up overnight, however Europe was down and USD/JPY continues to slide. This looks like it will scare Aussie investors in to doing nothing at all day heading into the Queen’s Birthday long weekend. Last night iron ore slipped slightly down $2.70 to US$113.90 a tonne; filtering through to BHP’s ADR, with the deposit receipts suggesting the security will drop five cents to $33.72 (-0.16%).

However, what might cause some to drop out of the market is the massive amount of Chinese data out over the weekend. The trade balance, CPI year-on-year, fixed asset investment and industrial production are all being released.

China data has been very choppy of late, which may see local investors closing out positions heading into the long weekend to miss out on any possible carnage on Tuesday. However, if the data shows stabilisation, the second week of winter may be a little less chilly for the ASX.
Market Price at 6:00am AEST Change Since Australian Market Close Percentage Change
AUD/USD 0.9616 0.0161 1.70%
USD/JPY 97.0350 -2.1050 -2.12%
ASX (cash) 4781 -0 0.00%
US DOW (cash) 15053 65 0.44%
US S&P (cash) 1627.2 12.1 0.75%
UK FTSE (cash) 6354 -55 -0.85%
German DAX (cash) 8154 -30 -0.37%
Japan 225 (cash) 12708 -196 -1.52%
Rio Tinto Plc (London) 27.47 -0.68 -2.42%
BHP Billiton Plc (London) 18.21 -0.22 -1.18%
BHP Billiton Ltd. ADR (US) (AUD) 33.72 -0.05 -0.16%
US Light Crude Oil (June) 94.72 0.91 0.98%
Gold (spot) 1413.40 16.1 1.15%
Aluminium (London) 1962 8 0.38%
Copper (London) 7329 -46 -0.63%
Nickel (London) 15068 -37 -0.24%
Zinc (London) 1934 -4 -0.21%
Iron Ore 113.9 -2.7 -2.30%

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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