IG Markets - Morning Thoughts

IG Markets - Morning Thoughts

This week has seen the ASX move through one to two percentage points every day in both directions; so far its 2-2 for down days and up days.
The net effect of the week’s tennis score sees the ASX down only eight points for the week.

We have been digging around as much as we can to find out what the source of the volatility is, however it is very hard to pin point the root cause(s).
The most likely answer is international bears selling out of the AUD and thus selling out of the index positions. It was interesting on Wednesday watching Glenn Stevens’ ‘Ben Bernanke moment’ by making an off-the-cuff remark which lead to a large slide in the AUD, and only hours later the market followed suit making this call a likely scenario.

However it doesn’t explain the upswings, and from that perspective we see end-of-year reporting season as a possible driver.

There has been a plethora of downgrades to guidance and production issue over the last three months. Material and industrial stocks have been climbing over each other to confess their sins to the market; this leaves really on one option for the upcoming reporting season – upside risk (those that don’t come up with good news will be punished).

Most investors in the market have been concentrating on the current spot rates of commodities whether it be copper, aluminium, natural gas or iron ore. What they are not factoring in are the average prices of the last six months.

Iron ore has an average price of $135 a tonne and the fact that the likes of FMG and BHP have maintained guidance and in the case of FMG actually ramped up production the probability of actuals coming in on the upside a strong. This explains the positive gyrations as current prices are historically undervalued, upside risk is starting to appear highly attractive to investors building base entry prices ahead of the July/August reporting season.

Moving back to today’s session, the US markets were closed overnight for Fourth of July celebrations, and so Europe was front and centre with both the ECB and BoE on the wires. As expected the BoE was a non-event, however the ECB was expected to provide some insight as to how it would approach the coming months. It is almost a year to the day since Mario Draghi announced his ‘whatever it takes’ rhetoric and last night he continued that theme. He announced the ECB will remain accommodative ‘as long as needed and that risk to eurozone growth remain on the downside’. This saw massive upswings across the region and should see the Asian region following suit as he has effectively forward forecasted ECB rates for years and will allow planning around that central theme.

Moving to the open, we are calling the ASX 200 up 27 points to 4822 (+0.57%), and we should see the market finishing +0.4% for the week. BHP saw very strong upswings in London, this should flow through to the ASX listing today, and with iron ore now pushing up to $122 it will only add to the upside risk.

Energy is the other space to watch over the coming weeks, natural gas is the only commodity to actually be in the green year-to-date and considering the fundamentals of Australia’s gas giants this space also has the potential to return to 2012 levels.

So after a violent and volatile start to the new financial year all eyes will finally start to swing to reporting season, which kicks off next week for the US - so bottom up views here we come.

Market Price at 6:00am AEST Change Since Australian Market Close Percentage Change
AUD/USD 0.9145 0.0026 0.29%
USD/JPY 100.0000 0.1800 0.18%
ASX (cash) 4822 27 0.57%
US DOW (cash) 15120 92 0.61%
US S&P (cash) 1627.7 10.6 0.66%
UK FTSE (cash) 6418 154 2.46%
German DAX (cash) 7998 121 1.54%
Japan 225 (cash) 14150 131 0.93%
Rio Tinto Plc (London) 27.00 0.51 1.93%
BHP Billiton Plc (London) 17.45 0.75 4.46%
US Light Crude Oil (June) 101.12 -0.11 -0.11%
Gold (spot) 1250.30 -4.1 -0.32%
Aluminium (London) 1810 3 0.19%
Copper (London) 6926 -23 -0.32%
Nickel (London) 13801 -37 -0.27%
Zinc (London) 1861 -8 -0.40%
Iron Ore 122 1.5 1.20%

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.

www.igmarkets.com

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