Stan Shamu for Chris Weston, Chief Market Strategist at IG Markets
Perhaps the most interesting moves were in the yen and the Nikkei, with the BoJ meeting being concluded and some data out of Japan as well. After getting off to a solid start coming back from yesterday’s holiday, the Nikkei slowly drifted lower as it tracked moves in USD/JPY. The pair was holding around 102.60 earlier but has since slipped to 102.40. In recent weeks USD/JPY has held a range between 102 and around 102.80 over the last week, and this is fairly timid compared to the moves we had grown accustomed to in the pair.
The BoJ has been quite vocal lately about being on track with its inflation target and this essentially reduces the possibility of more stimulus. Average cash earnings from Japan showed a 0.7% spike, well ahead of an expected 0.2%. This bodes well for Abenomics and is likely to create price pressure. As a result, the yen found some strength and weighed on the Nikkei. While the Nikkei is still in the black for the day, it has already reversed significantly and it wouldn’t be surprising to see it dip in the red once the BoJ’s outlook report and press conference come online. Should the BoJ reinforce its recent comments (as expected) regarding the progress in the economy and if we get any bullish revisions to projections then yen strength might continue. This would send the Nikkei into the red for the day.
Out of the US later we have ADP non-farm payrolls, GDP and the Fed to look out for. Analysts expect to see further tapering by $10 billion evenly split between treasuries and mortgage backed securities (MBS). While further tapering is expected, the Fed’s language is unlikely to change, reiterating an improving macroeconomic picture and low rates. With further tapering on the way, it is important we continue seeing positive US economic data. Should we continue to see a recovery in the US economy then the USD might extend its gains and push USD/JPY higher.
Europe pointing higher
Looking ahead to European trade, the major bourses are pointing lower. After yesterday’s disappointing economic releases including German CPI, Spanish unemployment and private loans, all eyes will be pinned on the region’s CPI today. Disappointing data initiated the slide in EUR/USD from around 1.388 and is now down to around 1.381. The single currency is facing some real tests at the moment and after Mario Draghi’s comments on the strength of the euro recently, then further downside could be on the cards.
Today’s CPI, due out at 7.00pm AEST, is expected to rebound from 0.5% to 0.8%. Some traders will now be expecting the disappointing German CPI print to cap the rebound and hence aid downside. A close below 1.38 could signal further weakness is on the way. While CPI will be the highlight we also have German retail sales/unemployment, French consumer spending, Spanish GDP and of course we’ll continue to monitor any developments on the Russia front closely. Any further weakness will strengthen the case for ECB action despite Mario Draghi being recently quoted as saying stimulus is under consideration but is not imminent.
Mixed trading for the ASX 200
It has been an interesting session locally, with the banks being the highlight. Banks got off to a positive start but once again succumbed to profit taking with analysts remaining pessimistic about the recent share price gain. Today it was Westpac being downgraded to underperform by Bank of America that set the tone and reinforced what we’d already heard from other analysts.
The recent run in share prices for the banks was quite astonishing and it seems even big dividend expectations are not enough to justify the premium. From a trading perspective the trend is king and no doubt the recent reversal would have seen some profit-taking as trailing stops are hit. Traders will now likely be looking to buy on a retest of the uptrend support in the short term. However, for investors a healthy pullback is necessary from a value perspective.
Perhaps ANZ’s report tomorrow will shed some light on what to expect from its peers. Additionally we might gain some valuable insight into the state of the domestic economy. Expectations for ANZ centre around four key parts to the report. The market will be listening out for:
1. Strong lending growth coupled with high capital concentration
2. Margin downside limited due to largest room to move on net interest margins
3. Market revenue strength from FX market trading
4. Increased growth in risk weight assets
This sees consensus forecast on the cash earnings line at A$3.437 billion; an 8% increase over the period with and interim dividend of 80 cents. ANZ’s net interest margin is expected to fall by approximately 11 basis points to 2.14%, however that will still see it with the largest margins of any of the big four banks. Total revenue estimated to hit A$5.337 billion.