IG Markets - Morning Thoughts and Opening Calls

IG Markets - Morning Thoughts and Opening Calls

Brace yourselves – winter is coming

Riots in Istanbul, central banks raising stop signs, bond yields on the rise and equity markets skidding; brace yourselves, we are in for a very rough ride over the coming weeks.

All this news has led to one thing and one thing only – high volatility. Volatility is the bane of long only investors; the current ‘correction’ in the market is heading towards a confidence killer, and this will only see volatility moving even higher.

Since the May 20 high, global volatility has been on a meteoric rise as a winter chill sets in. The Vstoxx index (measures the Stoxx 600 volatility) jumped 7.2% last night, to be up 29% over this period. The Chicago VIX index was up 11% last night to 17.07, and is higher by 18% over the same period.

Moving to the ASX 200 VIX index, it moved through an 11% range yesterday, closing 0.1 points from the high at 19.6, which sees the XVI up 55.5% since May 20 and heading higher.

This is the concern we have right now: macro headwinds are completely overwhelming the ASX. Major investors into this country (i.e. Japan, The US et. al.) are becoming concerned by governance in their own countries and here in Australia. The carry trade is retreating as central banks push bond yields higher, making it harder for overseas investors to purchase cheap debt and invest it in countries with high yield returns. This can be seen in the defensive stocks, which are on the slide.

The stop sign from central banks is also influencing the precious metals market. Gold fell to its lowest level in two weeks, as the store of value falls away on no additional stimulus hitting the markets. The BoJ and the Fed are holding firm and the thrust for the metal is waning, with China closed for the annual Dragon Boat festival; gold is at the whim of Europe and the US, not Asian demand, and could fall further today.

So where does this leave the ASX? The banks and the high-yielding stock are heading back to levels that saw huge support over the last seven months; however with the carry trade slowing, this buy support level may not eventuate and could see them falling back to secondary levels.

The resources are actually holding relatively firm; BHP is still $2.70 to $3.00 away from year-to-date lows of mid-$30. The question is whether the buying support can be sustained as long investors cash out and head back to cash.

It’s really unfortunate that bottom stories are being drowned out right now. However, the massive fall will present (in the near future too) a prime entry point for investors. We have said it before and we will say it again, the ASX is becoming a stock-pickers market; by the end of June and the start of July, the ASX could be ripe for the picking.

Ahead of the open, we are calling the ASX 200 down 42 points to 4716. The slide looks to be fairly universal, however BHP’s ADR is suggesting the security will only shed two cents to $33.06 (-0.06%) and may add support.

If BHP and even RIO can push back against the downward pressure today, the ASX may escape some of the carnage, however it does look like it is heading back to where it began in 2013.

The ASX opened the year at 4648 - that’s 109 points from yesterday’s close. The sustained pressure on the ASX, the AUD and the confidence of the investor could see the market moving into the red (year-to-date), making 2013 the fourth year of déjà vu.

Market Price at 6:00am AEST Change Since Australian Market Close Percentage Change
AUD/USD 0.9440 0.0030 0.31%
USD/JPY 95.9600 -2.2950 -2.34%
ASX (cash) 4716 -42 -0.87%
US DOW (cash) 15150 -74 -0.49%
US S&P (cash) 1631.7 -12.9 -0.78%
UK FTSE (cash) 6298 -86 -1.34%
German DAX (cash) 8175 -105 -1.27%
Japan 225 (cash) 12969 -349 -2.62%
Rio Tinto Plc (London) 27.55 0.15 0.55%
BHP Billiton Plc (London) 18.60 0.53 2.93%
BHP Billiton Ltd. ADR (US) (AUD) 33.08 -0.02 -0.06%
US Light Crude Oil (June) 94.99 -0.69 -0.72%
Gold (spot) 1378.15 -4.8 -0.35%
Aluminium (London) 1887 -43 -2.21%
Copper (London) 7067 -96 -1.35%
Nickel (London) 14486 -392 -2.63%
Zinc (London) 1856 -36 -1.92%
Iron Ore 110.90 0.0 0.00%

IG 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 if you require market commentary or the latest dealing price.

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