ASX at the close

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It seems calmer heads have prevailed in Europe and the US and the fact S&P futures were down 1.5% at the close of the Australian market yesterday saw a descent snap-back in early trade, although the index has found sellers today, despite a rampant Nikkei.

The Cypriot bank levy continues to take centre stage, and could still throw up volatility in the short term. Ex-ECB board member Mr Lorenzo Bini-Smaghi was on the wires today suggesting the European debt crisis was still firmly in play, while RBA deputy governor Mr Philippe Lowe said the Cyprus deal was a ‘step back for the eurozone’. Traders however, have taken a lighter view on the issue and we’re left with a market that really is waiting for an indication on direction. On one hand, many of the new short positions opened yesterday by traders were closed given the lack of follow-through in US trade, while at the same time the pull-back hasn’t been convincing enough to buy the dip either.

The vote has been pushed back until today, and what is clear (unlike other bailouts) is that it seems extremely messy and there is no clear consensus among the EU officials at this stage in the process. Angela Merkel needs to go back to her constituents with something. And perhaps it was the German leader who orchestrated the change in tact we saw in early Asian trade, where the deal has been re-jigged so small depositors (under €100,000) won’t have any levy imposed on them, while large deposits will make up the difference with an increase to 15.6%. This will no doubt incense certain corporations, and of course the Russians, who as we know have sizeable deposits in Cyprus. Ultimately the new levy could protect those who haven’t had such a hand in the huge leverage the banks have managed to amass. This vote still has to pass and it will probably have more of a chance in this current form than yesterday’s, but it still has to be voted in the German parliament, which is not a given.

Sentiment does seem to have improved in the markets after yesterday’s bloodbath. Perhaps some are saying there is still a chance of a run on Cypriot banks, but hopefully this won’t materialise in Italy, Spain, Portugal and Greece. While this can never be ruled out, the ECB will still do what is necessary. Anyone looking for the next ‘levy’ candidate should probably pay more attention to Slovenia, who has a sizeable (at least for the country anyhow) bond payment due soon of around €2 billion, contracting growth and around €7 billion of bad debts being housed by its banks, effectively equating to around 20% of GDP.

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As mentioned, Japan is on fire today, and testament to the nice bounce USD/JPY experienced yesterday off the base-line of the daily I-cloud we have highlighted, now at 93.79. The index looks set to break the recent high of 12,560 and we believe traders will look to buy dips in both the Nikkei and USD/JPY, at least up until the Japanese fiscal New Year on April 1, and the BoJ meeting on April 3 and 4. It was clearly positive to see the Japanese upper house vote through Mr Haruhiko Kuroda as the new BoJ governor and Mr Kikuo Iwata and Mr Hiroshi Nakaso as his deputies. Let the fun and games begin; the world will be watching to see if these three key personnel can do what is required to push inflation closer to 2%.

The Australian market did get off on the right foot, but saw little interest to bid up-stocks despite where US futures were in relation to yesterday’s close, and the strong Japanese market. The RBA minutes were in focus just before midday, but threw up little in the way of new information, especially as the RBA deputy governor had re-stated the bank’s ‘wait and see’ view just before.

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The fact that Mr Lowe highlighted the strength in the AUD was a good thing for the economy is interesting. While the local unit has clearly had a positive impact on inflation, it goes against all the tactics we are hearing from other central bank officials, in terms of talking about their domestic currency. It has been very clear that if a central bank is not already running a very easy monetary policy then it has had to aggressively talk down its currency, and push back on rate hike expectations (i.e. the Norges Bank and the RBNZ to a degree). If Mr Lowe is welcoming the high AUD, then this could be a green light for traders to buy, although we feel fading AUD/USD on rallies above 1.04 could be the way traders will go.

Of course the other interesting event is Westpac putting up its fixed-rate for the first time in two years. Some will question whether borrowers will rush through mortgage applications in fear that other banks will follow suit, although the headline could be misleading in so much that the bank is pulling away from a promotional rate. Still, at the very least it feeds into our view that rates are not going down again this year. The fact that the OIS market is now only pricing in thirteen basis points of cuts over the coming twelve months seems about right to us.

Despite a stronger Nikkei and modestly higher US futures, it seems European markets could get off to a mildly negative start. Data will play more of a focus than yesterday, with housing numbers in the US- in the form of housing starts and building permits, the ZEW survey out of Germany and CPI/RPI out of the UK. The UK core CPI is expected to fall modestly to 2.2%, although the real interest of the market will be tomorrow’s budget and the potential increase George Osborne will give powers to the remit of the BoE.

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Of course the Cyprus issue rolls on and we feel looking at tomorrow’s German bund auction makes sense to get a level of safe-haven demand, ahead of Thursday’s two-,five- and ten-year Spanish bond auctions.