Stan Shamu for Chris Weston, Chief Market Strategist at IG Markets
Iron ore comeback
This week we’ve seen some key markets in the region hit fresh cycle highs and investors will continue to assess whether the risk posed by emerging markets is worth the reward. US and European equities have been seeing some choppy trade with a bit of uncertainty around earnings data and Greece. This is unlikely to change in the near term and could be a deterrent for some investors for the time being. Japan and China seem to have detached themselves from economic reality and the gains we’ve been seeing are by no means a reflection of the underlying economies. Another disappointing piece of data in the form of the HSBC flash manufacturing PMI was testament to the fact activity remains subdued. This also follows the recent trade balance disappointment. Regardless, equites continue to be bought up and this just shows just what sort of impact stimulus can have on investors’ mindset. Should financial markets be a leading indicator of things to come, then certainly economic prosperity would be on the way in these countries. As of yesterday’s close, the CSI 300 was up a whopping 34% year-to-date. The temptation to take profits will be quite high in the near term and that could be a source of volatility. However, judging by the momentum we’ve been seeing, there is a belief equities will keep on rising.
Roles reverse for the ASX 200
Yesterday’s CPI reading seems to have temporarily turned on its head as expectations of a May rate cut start to wind down. There are 26 out of 28 economists calling for a rate cut in May with NAB being the first to change its call from May to August. Market pricing is still about 50-50 and with a lot of the key prints out of the way until the May meeting, it doesn’t seem much will change till then. In fact, we’ve even seen some positive signs in iron ore prices and that’ll be supportive in the near term. Whether the move in iron ore prices is sustainable or not remains debatable but it certainly has been enough to resuscitate the ailing iron ore names. This has resulted in a role reversal with the normally robust yield plays losing ground, while materials and energy sectors are actually positive. The bounce in iron ore was triggered by BHP’s move to defer spending on its iron ore division. FMG has been the outperformer today after securing its near term capital position through issuing US$2.3 billion of Senior Secure Notes. While some analysts feel this has come at a material cost due to a 9.75% coupon, investors feel this will help the company navigate an uncertain path. This move saw the miner’s share price pop back above $2 with some of the shorting interest falling away.
Firmer open for Europe
Apart from the FTSE, European markets are pointing higher with some mild optimism around Greece helping sentiment. This saw the country’s bond yields cool and equities pick up some ground. Reports suggesting the ECB had agreed to expand the ELA by 1.5 billion euro drove the optimism but this is hardly a significant amount, showing just how sensitive markets are to headlines at the moment. However, the euro barely flinched and remains relatively sidelined. Cable was on the move after the sterling reacted to BoE minutes. Traders construed the minutes to have a hawkish bias and the sterling managed to gain ground against the greenback and euro. This was unfortunately negative for equities and given the sterling has remained firm then the trend might continue into today’s session. On the calendar today there are a raft of manufacturing and services PMIs which are likely to set the tone for markets.
(EUR/GBP downtrend)
