ASX at the close

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by Chris Weston, IG Markets

There has been a sense of excitement through the markets today, not just because of the binary outcome in the Scottish referendum, but because there seems to be a fundamental shift occurring through the capital markets.

Firstly, I have to say Janet Yellen and the Federal Reserve are doing a top-notch job in managing asset prices. By all intents and purposes, they have told the market they plan to raise short-term rates five times in 2015 and a further six in 2016 – and the S&P 500 continues to find buyers. The fact that the Fed have such aggressive targets for the funds rate appears to be real confirmation the USD is the standout currency to be long. However, my major point of contention is the Fed’s inflation forecasts really don’t justify moving the funds rate to 2.9% (using their mid-point) in 2016.

USD looking overbought

Still the USD is overbought, but more so against the low yielding currencies. The trade of being long currencies is where central banks are looking to restrict policy, while funding the position by being short currencies from low inflation economies (Japan and Europe) is long in the tooth. With USD/JPY at ¥109.15, the upside from here seems limited.

However, for those who like to align themselves with trends, this trade has been as clear cut as they get. The USD is overbought at current levels, but I continue to believe the greenback is going to gain substantially over the coming years against both the JPY and EUR, and we need to look at assets and companies that benefit from this move.

If the Fed are going to raise aggressively, we have to think that US bond yields are going higher from here. The hunt for yield in the equity market will struggle and, while I am certainly not an advocate of shorting Aussie banks, I feel there will be much better two-volatility from here.

It also seems logical that strategists are once again looking at potential vulnerabilities in emerging markets, especially for those who haven’t addressed current account imbalances as well as India have. I would immediately argue that long USD/TRY (Turkish lira) or USD/ZAR (South African rand) make sense, given they have sizeable deficits that require external funding.

On the subject of ballooning central bank divergence, there has been some discussion about yesterday’s poor take up of funds from the ECB’s Targeted Long-Term Refinancing Operations (TLTRO) increasing the likelihood of all-out QE from the ECB. The fact that a modest 225 (of a possible 382) institutions borrowed 20% of the funds available at a mere 15 basis points has had some suggesting banks just aren’t prepared to lend. This seems unjustified though, and with the bank asset quality review due in a month and a degree of negative stigma attached to taking these funds, there was always a chance the take up would be poor. We therefore need to centre our attention on the December TLTRO, with expectations that this allotment should be well supported.

In Asia, traders have continued to bid up the Nikkei today, with the index at the highest levels since 2007. As I have said, if traders want to hedge a rise in US bond yields, then being long the Nikkei makes absolute sense, given the impact a higher USD/JPY has on the market. The ten-day correlation between the US five year bonds and USD/JPY is 71%, and this correlation will only continue.

Of course, the big news today has been the Scottish referendum on independence. Trading desks have been staffed in London, with all hands on deck around Asia and Australia. The market was always positioned for Scotland to remain in the United Kingdom and at no stage had the rates market displayed any signs of stress. A lower prospect of upcoming hikes from the BoE was never really priced out. Perhaps this conviction was heightened when the president of YouGov, Peter Kellner, said he felt the odds of a ‘no’ vote were 99%. From here, we have seen sustained buying in sterling, most notably against the JPY, AUD and NZD.

Traders fading cable moves

On GBP/USD, the downtrend drawn from the July 15 high at $1.6418 has been broken, with the pair hitting $1.6524 – just short of the series of August lows. As the day rolled on and the ‘no’ camp gathered momentum, traders started to fade the move and there has been an element of ‘sell the rumour’ materialising.

image002

FTSE futures have been bid all day. There seems like there will be relief shown in the market, with the rest of Europe probably expressing some comfort that EUR/GBP hasn’t rallied significantly – this of course would have happened if independence had come to pass. UK financials will naturally be in focus, as will the usual suspects, such as Weir, Barr, Diageo and Stagecoach.

Scotland remains an integral part of the UK and, while some concern has been shown that the majority in Glasgow voted for independence, it wasn’t a strong majority. Markets can move on from this event now, but the fate of the pound is still subject to great debate. We know the Fed have opened the door to rate hikes and have signalled they will be more aggressive than the BoE’s gradual approach. With 5% currency account deficit, however, GBP/USD could be vulnerable.

Ahead of the European open we are calling the FTSE 6898 +79, DAX 9868 +70, CAC 4479 +15, IBEX 11058 +67 and MIB 21248 +120

 

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Comments

      • Well mate, gold & Aud look vulnerable, pound crosses have sold the rumour on the news……. but as it’s Friday night…….. if you’ve got to force a trade there might be something in Eur/Cad?

        Not a case of step up TF’s or stand back for a while Mig?

      • Uncharacteristically gigantic volume for BKL, too, as the stock rose 2.44% to reach its new 52 week high.

        In fact, looks like many stocks experienced huge volumes at the close. Looks like a big player carried out a major rebalancing of his portfolio.

      • Quadruple witching time in the states and quarterly S&P re-balancing means a lot of portfolio adjustments and a pick up in FX volatility.

        Guess some are still adjusting from the volatility from the Scottish vote. Another Japan downgrade may have also forced some people to react.

      • Yeah, that sounds like the case……

        Speaking of the Scottish vote, has the lost side formally requested a recount yet, presumably with the help of Putin and his ex-KGB friends specialized in manipulating votes?

      • Regarding the Scottish referendum vote I read somewhere that there was to be no recounts due to a close outcome. A recount would only be undertaken if there were electoral process issues. No idea what that involves – chain of custody stuff is my guess.

        The independence issue wont go away. Looking at the voting distribution all they need to do is just wait until the oldies drop off the perch:

        https://twitter.com/LordAshcroft/status/512895230132371456/photo/1

      • FWD is now at x0.51 of its book value……. very very close to my top-up point. It may hit the x0.5 mark on Monday. Time to double my stake……

        SLX looking good, jumping by > 10%. History shows that uranium always came back after each major nuclear accident….. Chernobyl, 3 mile island, …..

        Needless to say, I do not buy “this time is different” – the most dangerous words in investing.

  1. The Arrium show rolls on amusingly:

    Their new director has had a crack at catching a falling knife, splashing out another 95K, after splashing out 190K last month.

    http://www.asx.com.au/asx/statistics/displayAnnouncement.do?display=pdf&idsId=01554521

    While Jerry is taking the long side the the short sellers moved in yesterday, 18th, with 2.75% reported short:

    http://www.asx.com.au/data/shortsell.txt

    Might be the Underwriter clearing out some stock from the institutional overhang. Either way it does not bode well for the retail take up.

  2. AFFORDABLE HOUSING: THE GLACIAL PACE OF THE GREAT INERTIA SECTOR OF LOCAL GOVERNMENT

    In early 2005, the first Annual Demographia International Housing Affordability Survey was released …

    Demographia: International Housing Affordabilty: February 2005 Issue

    http://www.demographia.com/dhi-200502.htm

    … with the 10th Annual Survey released January 2014 …

    2014 10th Annual Demographia International Housing Affordability Survey

    http://www.demographia.com/dhi.pdf

  3. Christchurch NZ Unpaid Council Rates near 10% of the Rating Base …

    Unpaid city rates total $10m – news – the-press | Stuff.co.nz

    http://www.stuff.co.nz/the-press/news/10522126/Unpaid-city-rates-total-10m

    (comment below not posted by The Press)

    Not surprisingly, due to the bureaucrats doing all they can to disrupt the recovery, many are in financial difficulties.

    The 2013 Census showed that the Christchurch population had dropped by 8,000, while the Canterbury population had lifted by about 17,000.

    Remarkably … the article makes no mention of the shrinkage of the Ratibg Base.

    There has been a massive flight of people and businesses out to the smaller adjoining County Areas of Selwyn, Waimakariri ans Hurunui … as Christchurch Mayor Lianne “Detroit” Dalziel persist in tinkering. It is surreal.

    Christchurch Council Circus … Continued | Scoop News

    http://www.scoop.co.nz/stories/PO1408/S00523/christchurch-council-circus-continued.htm

    Christchurch: the Political Shambles | Scoop News

    http://www.scoop.co.nz/stories/AK1307/S00201/christchurch-the-political-shambles.htm

  4. NEW ZEALAND ELECTION:
    BETTER INFORMED VOTERS
    SUPPORT WHAT WORKS

    Hugh Pavletich
    http://www.PerformanceUrbanPlanning.org
    Christchurch
    New Zealand

    21 September 2014

    Saturday 20th September 2014 was a very bad day for the broad, incoherent and increasingly irrelevant Left and their cheerleaders within certain elements of the mainstream media … as the New Zealand General Election results illustrate …

    http://electionresults.govt.nz/

    … with under the MMP system, the lead Centre Right Party National obtaining double the votes of its main Centre Left Party Labour …

    http://electionresults.govt.nz/partystatus.html

    • In the 2008 election, the major Centre Right Party attracted 44% of the votes cast; in 2011 some 47% and this election 48%.

      The New Zealand Left however has been in serious decline in New Zealand, as this 2000 – 2014 graph from a leading New Zealand polling company Colmar Brunton clearly illustrates … reported on Kiwiblog … THE FALL AND FALL OF LABOUR …

      http://www.kiwiblog.co.nz/2014/09/the_fall_and_fall_of_labour.html

      This is part of an international trend, as recently outlined within THE SHIFT TO CONSERVATIVE VALUES … WITH THE YOUNG TOO … quoting eminent Hoover Institution economist Dr Thomas Sowell as well …

      http://www.scoop.co.nz/stories/AK1409/S00005/the-shift-to-conservative-values-with-the-young-too.htm

    • Interestingly, the Chinese Communist Party is more supportive of a market economy than the static broad Left of New Zealand … as this recent CaixinOnline article CREDIT CRUNCH IS NO REASON TO RESORT TO OLD WAYS illustrates … …

      http://english.caixin.com/2014-09-03/100724738.html

      The election campaign itself was vitriolic, as a desperate Left attempted to distract voters, with a barrage of odd national security conspiracy theories and leaked personal emails. Irresponsible elements within the dying mainstream media provided saturation coverage … suffocating discussion of real policy issues.

      These tirades were led by unusual characters Nicky Hager, with his book of hacked personal emails and a German by the name of Kim Dot Com, conveniently parked up in New Zealand, who appears to be in no hurry to come face to face with the US justice system.

      Remarkably, the unusual character Kim Dom Com gained “cult status” with weakly managed, impressionable and immature elements within the mainstream media. It was surreal.

    • The election campaign however was not won by any outstanding campaign strategies of the Centre Right or by National’s leader “can kicker” John Key. For most voters, the “rag-tag “muddle of the Left, with nothing constructive and workable to say, was simply not an option. Even more than that, it was an embarrassment.

      The tool of the internet allowing people to access quality information, and the decline of the heritage media, is the major reason for these political shifts. The internet can be described as a “disinfectant for democracy”.

      Kiwiblog recently reported on a US Gallup Poll … US TRUST IN MEDIA HITS NEW LOW …

      http://www.kiwiblog.co.nz/2014/09/us_trust_in_media_hits_new_low.html

      ENDS

  5. Yes, Hugh. There was no viable alternative to “can kicker” John Key. And that’s what New Zealand can now look forward to. More can-kicking. So whatever reforms you may have thought you saw emerging in our residential real estate backed economy – wave “Goodbye!” to them now that the election is over……

    • Janet … with all due respect you are quite incorrect.

      Mr Key has been a “can kicker” since backsliding from Nationals clear position out of the 2008 election … BRINGING BETTER BALANCE IN TO THE HOUSUING MARKET Phil Heatley then Housing Minister …

      http://beehive.govt.nz/release/bringing-better-balance-housing-market

      … and as I outlined late 2012 … HOUSING: MR KEY – GET ON THE PROGRAMME ..

      http://www.scoop.co.nz/stories/HL1212/S00041/housing-mr-key-get-on-the-programme.htm

      In spite of this, New Zealand happens to be the global leader in politically progressing the essential housing / Local Government reform issues (refer http://www.PerformanceUrbanPlanning.org ). The pace will speed now.

      • I’d be delighted to be proven wrong, Hugh. But I doubt that I shall be 🙁
        New Zealanders have a trait of sticking to the status quo until it pokes them in both eyes. Look at what happened to Christchurch! Bob Parker was on the way out; dead in the poll waters until the ‘quake hit. And what did Christchurch residents do faced with uncertainty? Re-elected the status quo. Similar has happened at this election. Although as I suggested above, that’s not a surprise given the woeful state of the disparate ‘opposition’.
        But now that the dust has settled, so will the reform process that you optimistically see. Christchurch will revert to being dragged out over years; decades, and general property market reforms will stall, not speed up, so as not to upset the entrenched apple cart. Why? Because in 3 years time, we can have another round of ‘affordable housing’ bribes thrown at us.
        (“Mr Roughan equated this to Mr Key’s previous career in foreign exchange markets. “You’ve got to know which events are going to shift currency and which won’t,” he said. Prof Vowles agreed. “Currency trading is all about managing the moment. It’s short-term strategy and that’s John Key,” he said. “He doesn’t have a long-term strategy, he doesn’t think in those terms.”
        http://www.bbc.co.uk/news/world-asia-29201787

      • “New Zealanders have a trait of sticking to the status quo until it pokes them in both eyes.”

        That makes excellent soldiers I guess…… holding onto their positions when everybody is jumping at them…… precisely what Americans are desperately looking for to deploy to northern Iraq, you know!!!

  6. Sadly, it seems that the only way forward is for an economic collapse of such dimensions that sheer anger will bulldoze the current morally corrupt politico-housing-banking complex into historically shameful oblivion.

    This is why we must keep repeating over and over in simple terms what needs to be done in order to make normal housing construction affordable for the young and lower and middle income earners again – ie – the great bulk of society that have been betrayed by our traitorous parliaments. My two favourite points are – * abolition of urban growth boundaries and making all mortgages non-recourse (lenders must pay for their mistakes too!). – This way, people will know why and where to direct their anger as the economy gets permanently soggy or collapses and what needs to be urgently done when the collapse hits.

    There are times in history when revolutions are unavoidable.

    http://www.youtube.com/watch?v=Vq7JSic1DtM

  7. Hugh PavletichMEMBER

    Party vote baffles (Christchurch) Labour supporters | Georgina Stylianou | Christchurch … The Press

    http://www.stuff.co.nz/the-press/news/10525445/Party-vote-baffles-Labour-supporters

    … extract …

    Labour supporters are baffled, shocked and defeated after a National hammering in Christchurch.

    Megan Woods, Ruth Dyson and Poto Williams managed to retain their electorates but the party vote in all three strongly favoured National.

    http://electionresults.govt.nz/

    http://electionresults.govt.nz/partystatus.html

    Hugh Pavletich
    http://www.performanceurbanplanning.org/ & http://info.scoop.co.nz/Hugh_Pavletich
    Christchurch
    New Zealand

  8. CHRISTCHURCH … A LONG-TERM LABOUR DISASTER

    (Labour) Get over the disbelief fast … Opinion … Mike Wright … The Press

    http://www.stuff.co.nz/the-press/opinion/10527425/Get-over-the-disbelief-fast

    … extract …

    A Labour supporter on Saturday night told The Press she was “baffled” by National’s win. “I just don’t know how people don’t see what we see,” she said.

    Therein lies the party’s problem. If it wants to govern, it needs to get over its disbelief fast and find a reason for more New Zealanders to start believing in it.

    If not, three more years will quickly become six.