It’s been a mixed day in Asia, and once again some of the traditional correlations within the capital markets have broken down.
EUR/USD found buyers on the open, trading to a high of 1.3068 after the weekend news that Italy has formed a government after two months without one. There is something in there for all Italians, and the make-up of parliament should be enough to pass both the lower and upper house votes over the next couple of days. How stable this set-up is will be weighed up by the market; however, we believe that the trading community should see this in a positive light, although many will question whether they have the unity to push through broad-based reforms long term. Certainly our flows towards the Italian MIB 40 have been biased towards longs, with 67% of clients favouring a bullish stance, although sellers have been prevalent in the last hour or so.
There has already been a strong move in Italian yields of late, with the ten-year trading under 4% last week. Perhaps you could make a case that the market was positioning for a favourable political outcome here. The Italian treasury will try and tap the market in early European trade for €6 billion in both five- and ten-year bonds, and the level of demand will be closely watched given the lower yield on offer. At the previous auction we saw the bid to cover ratio at 1.22 xs and 1.33 xs respectively for the five- and ten-year auction, while the yield achieved was significantly higher than the current level. Good demand could put upside in EUR/USD, which is being supported in the face of poor data and a potential refinancing rate cut by expectations of a current account surplus of 3% of GDP this year. Compare that to the IMF’s forecasts that the US, UK and Canada will achieve a current account deficit of 3% of GDP; you can see the relative appeal. Clearly, running such tight fiscal positions are limiting import demand which in turn is helping that equation, and shows that a rejection of austerity and the adoption of pro-growth measures could actually push up import demand, and in theory have a negative effect on the currency. As seen in years past with Japan and Switzerland, the forex market will always favour a surplus over a deficit every day of the week.
Japan has been closed today for Showa Day, but futures (traded over SGX) are still open and the fact they have fallen 1.4% is clearly a function of USD/JPY continuing where it left off from the Friday US session, with selling. We have been USD/JPY bulls for some time and remain so; however, our trading bias would be to sell rallies this week and would look to enter longs around the base-line of the ichimoku cloud currently at 96.26. This level has been a reliable buy zone for some-time, although the risk is the pair doesn’t get there. With the Fed and US payrolls in focus this week, the USD side of the equation could take central focus, although the market will still be keen to watch any signs that Japanese retail and institutional funds are starting to buy foreign assets. With European, US and even Australian yields at such low levels it’s hard to see a major overseas move anytime soon, although as seen in recent investment commentary we know the Japanese life funds are preparing to increase overseas exposure.
The ASX 200 has not really blinked an eye at the Nikkei futures, with investors and traders doing what they seem to know best; buying the yield names. As mentioned on Friday, the banks will be in play given they (except CBA) report 1H earnings. ANZ will be out tomorrow and the market currently feels they will detail cash earnings of $3.13 billion. Certainly the increase will largely be helped by a lower debt charge, while the interim dividend should be 68 cents, which would be in line with last year’s 60% payout ratio. Net interest margins should fall modestly to 2.25%, after printing 2.35% in 1H 2012, although these are still higher than its peers. Price action in the banks still seem to be attracting momentum with traders, and while the different names are printing higher highs and lows, these players will stay long until proven otherwise. Material names have once again found sellers and this shows how tough a space it is to trade. Down one day and up another, there just isn’t any traction, but when you get a US Q1 GDP print 50bp below consensus at 2.5% this is the space that will struggle.
US futures are modestly lower and getting torn by lower Nikkei futures against a strong Australian market. Liquidity is predictably poor with just over 26,000 S&P 500 futures contracts traded on the day. US personal spending and income will be in focus today, and both reads are not expected to show much life at all. In Europe, German preliminary CPI could aid the case for a cut to the refinancing rate later this week by the ECB, although one could argue the consensus read of 1.4% (annualised) could be enough. ECB member Jorg Asmussen speaks on European trade and he may provide clues as to Thursday’s outcome; Recall he has already said a rate cut is possible. On the earnings side, Newmont Mining should get the greater attention and while the market is expecting 1Q (adjusted) EPS of 77 cents, this figure has been revised down 18% over the last four weeks (source Bloomberg).