ASX at the close

The strong moves in the Nikkei seem quite logical to us, given USD/JPY has once again rallied just shy of the 100.00 level. However, what seems less logical was the early spike higher in FTSE futures (currently up 0.9%) on what seems like limited news flow. There has been some news towards an extension to the UK funding for lending scheme (FLS), but we can’t quite see why this area of the market is getting so much more attention than our other key European markets.

Weekend news flow has been limited, however the lack of any negative rhetoric aimed at the BoJ from the weekend G20 meeting has provided the market with a fresh green light to sell JPY, and thus predicably push up the Nikkei to new highs. It will be key week for Japan, with the BoJ holding its monthly meeting and semi-annual outlook report, while a number of the largest life insurance companies will report their investment plans for the fiscal year. Of course these plans could have massive ramifications on other foreign fixed income markets, and subsequently the domestic currency. We certainly haven’t seen evidence of any outflows from Japan as yet. In fact, recent data has shown Japanese investors have been net sellers of foreign bonds, so the strategies of the different lifers could be a major driving force. Keep an eye on perhaps the biggest life insurance player Nippon Life tomorrow, who will detail its plans; Asia could see a continuation of volatility.

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The Australian market has underperformed and etched out a modest gain of 0.7%. While the banks seem supported ahead of the upcoming dividend session, it’s the material names which continue to confuse the market.

Perhaps one of the areas that is fascinating the market is the gold space, and while we have been long-term bears on gold, we have warmed to the space. The psychological damage done to the gold complex after the mass liquidation last week has been huge, however the metal seems to have bottomed for now and has retraced over 32% of the two day sell-off. Inflation is the word of the day, and what falling prices could actually mean for monetary policy going forward at a number of different central banks. As things stand, the bond market (as measured by US five-year break-evens) is suggesting inflation of around 2% over the next five years, however it’s the recent commentary from St Louis Fed president James Bullard (a voting member) which has caught our eye.

Mr Bullard has not been overly dovish of late, but has suggested on a number of occasions that the market is paying too much attention to employment. His suggestions  that the Fed may buy more bonds if inflation ‘continues to go down’ is very interesting, and can be added to commentary from other central bankers such as the BoE’s Martin Weale and ECB’s Oliver Weidmann, who have also suggested that more could be done if inflation fell.

Our base case was that the Fed could taper the pace of asset purchases towards the back-end of the year, however these are markets re-pricing different outcomes at a great pace and thus you have to be able to react. If commodities continue to fall on the back of softening data, then central banks will react as well. At the end of the day, a central bank will always find it far easier to use policy to pull an economy out of inflation than deflation, predominantly as most western societies are cautious in nature when it comes to their household balance sheet. However, we find it interesting that after a month or so of debating when the Fed will act to start normalising policy, we are now hearing views on the other foot and this in turn is bullish for gold, not to mention the good pick-up in physical buying of late.

So as things stand, a positive open is expected in Europe, although as the day has gone on we have seen a slight bias to sell our out-of-hours markets. Data is light on the ground today with eurozone consumer confidence and US existing home sales the highlights. On the earnings side, all eyes will be on Caterpillar, with speculation that the company may cut its full-year guidance. As things stand, consensus suggests Caterpillar will announce Q1 (adjusted) EPS of $1.39, on revenue of $13.69 billion. Its full-year EPS estimate currently sits at $7 to $9, although the market is positioned at the top-end of that range and full-year revenue of $60 to $68 billion. Of course, any views on Chinese and global growth are always scrutinised and could have ramifications on other asset classes. In recent weeks there have been a number of sell-side analysts cutting the stock in the lead up to Q1 reporting season.

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