ASX at the close

Another day, another high in the US markets. While the S&P 500 now has the 1600 level in its sight, the NASDAQ still needs to break its 2012 high of 2878. The global equity rout continues, and while the focus has been on liquidity, the attention now shifts to corporate America and the Q1 earnings season.

JP Morgan (JPM) and Wells Fargo (WFC) get the ball rolling and while WFC has more leverage to the US economy, being such a key player in the US mortgage market, we actually like JP Morgan from a trading perceptive. The bank is expected to earn Q1 EPS (adjusted) of $1.39 and revenue of $25.8 billion, but of course many will be watching trading revenues, with the market expected to see strong increases here. Investment banking fees could fall however, notably in the advisory business and of course these metrics could see other banks such as Goldman Sachs come into play. The stock has no real pedigree around earnings season, having fallen three of the last five reporting quarters. However, we like the price action and the bank is in a firm uptrend from June 5, and after a small pullback, this seems to have given traders the impetus to potentially push back through the recent high of $51.00. We feel traders could look to place stops below the June uptrend at $45.25.

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Elsewhere, advanced retail sales and University of Michigan confidence numbers are due out. However, they probably don’t command the same degree of attention as the different employment metrics have on stocks, treasuries and of course USD/JPY.

Asia has been fairly subdued today, and in the case of Japan all good things do come to an end it appears (the index is down 0.5%). The Nikkei has found sellers today, which to be fair, is not overly surpassing considering as the index had rallied around 11% from the BoJ’s announcement to focus on base money and the massive expansion of the monetary base. The fact that USD/JPY has just lacked the impetus to break ¥100 is testament to the raft of option barriers at the figure, but many of these expired yesterday, so good numbers in US data and further rallies in European and US equities could see the pair move into a new, higher range. Perhaps the next kicker could come from international buyers of Japanese stocks who have not hedged existing holdings, of which there are still many.

The Japanese bond market has come alive this week and after being a boring, lifeless market for so long, it is exerting some of the biggest volatility in any part of the capital markets. Yesterday’s ¥600 billion thirty-year auction had a decent bid-to-cover ratio, but the average yield achieved was poor and has installed no confidence in the bond market at all. It seems the BoJ is trying its best to smooth out this volatility here. Any further volatility could see JPY short cover.

On that note, it’s clear now that the fixed income market seems to be controlling both the forex and global equity markets (to a lesser extent). The perception of where Japanese fund flows will be deployed as the different institutional and retail players search out yield is real, and what is clear is that while some of these funds will make it into peripheral European debt markets, some could flow into Australian bank deposits and the debt market. It’s also worth highlighting therefore that data out yesterday showed China’s currency reserves increased by a massive $130 billion to $3440 billion. As highlighted, the market is focusing primarily on Japan, but history has shown us that investment-grade bonds tend to attract currency reserves and we feel these funds will flow to Australia over Europe. Therefore, taking a fundamental view on the bond market we feel this would result in a lower EUR/AUD over the course of the year. What’s more, with the market now fully pricing in a rate cut by the end of the year in Australia, we think the downside caused by higher unemployment should be cushioned.

The Australian market has closed the final day of the week with a gain of 0.1% (although it is up over 2% for the week), with material and industrial stocks under pressure, while A-REITS and staples have performed well. The energy sector is up 1.0%, but this was really just a function of strength in Woodside Petroleum. While the proposed concept for Browse was not deemed commercial, this will probably not shock a lot of analysts, however what happens now will be interesting for shareholders. Given the low-gearing levels and sizeable excess of franking credits, some feel a special dividend could be on the cards, others believe the company may look at buying back some of Shell’s 24% stake. Interestingly, Reuters is reporting that the company has pledged an application for a Canadian LNG licence. Short AUD/CAD has been a terrible trade, but it will be interesting to see if this news can help it at all.

European markets look like they are going to attract reasonable sellers on the open, although our out-of-hours flows have been mixed and lacking any real conviction. US futures are down 0.2% from the close of the European cash session, so it looks as though the markets will underperform that lead. Still, good numbers out of the US both from JPMorgan and Wells Fargo, backed up by some strong US data could cause traders to buy the dip and this is likely to be seen on the open. Eurozone industrial production numbers could also come into focus.

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