ASX at the close

Chris Weston, Chief Market Strategist at IG Markets

It’s a good day to be an equity bull.

European and US markets look set for a renewed tilt at recent or all-time highs, while the Nikkei has found good buying and looks set to test the top of its recent range at 18,000. Even the Greek market has seen a modest rebound and, while there have been articles about Greece having no choice but to leave the monetary union, there is also an argument that the current program of structural reform will be maintained.

ASX 200 looking strong

Locally in Australia the ASX 200 is a pillar of strength and is on track for a weekly gain of 2%, building on last week’s 3.8% rally. The bulls are dominant and, after a 6.6% gain from the 16 January low, has the August highs and 5700 on the index in their sights.

The swaps market is now pricing a 65% chance of a rate cut next week, although this is no certainty and, to be fair, traders are cueing off one article by a journalist who hasn’t had the same inroads to the Reserve Bank of Australia (RBA) for many years. Caution is therefore required and I think the playbook is not as black or white as the RBA simply leaving rates at 2.5% and the AUD subsequently rallying.

There is every chance we will see rates unchanged, but the RBA changing the last paragraph in their statement, removing the key phrase ‘on present indications, the most prudent course is likely to be a period of stability in interest rates’ to something more dovish like there is ‘some scope to ease’. This, in turn, will give a clear signal they will be cutting in March.

In this case, we could see AUD/USD all over the place and after an initial pop we could see the currency undergo a vicious reversal. As mentioned yesterday, it is understandable why implied options volatility is so high.

There is an argument that the RBA will be keen to leave the cash rate as it is to give it firepower in case of a major offshore economic development further down the line. However, if we do see rates on hold, then the full focus of the market will turn to Friday’s Statement on Monetary Policy. Recall one of the inputs the central bank uses for its June 2015 inflation forecasts of 1.5% to 2.5% is Brent Crude, which they previously forecast at $86. Given front month Brent is trading 43% below their prior estimate, it will be interesting to see if they tweak the forecasts.

Still, judging by price action in the market, there is a real belief the RBA are going to join New Zealand, Europe, Denmark, Switzerland and Canada in easing policy. The fact the buying in the ASX 200 is fairly broad-based is interesting, but that could also be a function of the Chinese Vice finance minister saying China will keep strong and sustainable growth between 2016 and 2020.

Keep in mind that we get Chinese manufacturing PMI numbers over the coming week, so there is risk of gapping on Monday. Market consensus is that we see manufacturing expand at a slightly faster rate at 50.2.

Positive signs in Europe

With Asian markets generally supported, we should see a positive open in Europe. We all know European markets have performed strongly as traders priced in the idea of liquidity making its way into the equity market.

Still, I think there are some signs of ‘green shoots’ in Europe. Firstly, if the European Central Bank focused on core inflation as opposed to headline inflation, they probably wouldn’t have announced its recent QE program in the first place. Headline inflation is released today and expected to fall another 30 basis points to -0.5%. Core inflation, however, should stay unchanged at 0.7%.

We have seen signs in the ECB’s Q4 bank lending survey that banks are starting to lend more, with new loans to business hitting the highest level in over three years. Yesterday’s M3 money supply continued to improve and is now running at a 3.6% annualised rate. Perhaps things aren’t so bad and it’s possible we will see inflationary signs later this year, with ECB economist Peter Praet saying yesterday that the turning point in inflation ‘may be around be around Q3’.

A basic ‘fair value’ model of EUR/USD (using a number of variables, including two-year swap rates) suggests EUR/USD could find better buying in the short term and perhaps the heavy selling is over for now. Near-term resistance is seen at the December downtrend at $1.1450 and a break here would see the pair target the 38.2% retracement of the December sell-off at $1.1659.

I’ll be watching the US employment cost index (expected to grow at an annualised pace of 2.4%), as this is a data point that the Fed watches closely. Further improvement could see the market once again focus on when or if the Fed will hike.

Comments

  1. Just quickly, Harvey Norman at a 52 week high. Considering that everything they sell is imported how is it that a huge decline in AUD which directly affects what people can buy and their margins result with this new high?

    Lower fuel prices? Consumers have more to spend?

    The only thing positive for Harvey Norman is possibly the fact that they are selling items they paid for many months ago. Essentially they gained short term via holding items bought with usd at say 90 cents?

    What is it? Why the gain?

    • Their foreign business increasing profits via exchange? If you make zero over seas its still zero via conversion. At least that is the denominator i understand it to be.

    • Your not the only one confused. Premature assumption of an interest rate cut is my guess but even then it is a weak argument.

      There was a broker upgrade a little while back and Harvey was making some noise in the media about sales being great. The ASX gave them a speeding ticket although there was nothing material declared.

      Effect of the euro depreciation on the OS stores should be interesting – as should the mining and CSG accommodation venture. Looking for impairments but im not sure they will happen.

      • Drop the cap rate on the HVN property portfolio and, hey presto!

        But seriously – how did he get away with saying nothing to the ASX and then banging on to the press about booming sales in personal devices or whatever crap he was selling?

        And what about TTS?

        Over 20 times PE and analysts were downgrading in low $3s – came close to putting some shorts out in that name today – I haven’t seen any reason to be bullish on the outlook.

      • Needs more research, their franchise structure leaves me a little bewilded as well as their debt.

        Yay for yeild and nay to stable growth.

        How long until Harvey Norman franchisees are on today tonight complaining about Gerry harvey?

      • I did 888888 as well as count in stock directly owned by the company.

        Just the murkiness of franchisees i cant really decipher. It’s probably fair value.

  2. US DXY has been on a solid tear for a while & surely has to be a crowded trade. Any thoughts on what will happen to the AUD if/when it reverses?

    ……….. & what that trigger would be?

  3. Lol about tatts but i do suppose they hold a monopoly in a sense.

    Can australians gamble any more?

    • Exactly. At least gaming addicts and/or pensioners are a steady revenue stream. Assuming the company doesn’t run foul of the regulators and can keep it together such that the dividend holds up they should be fine. Better than bank interest – that’s all you need to know.

      Not sure I could short the stock. Betting against the collective stupidity of gamblers in the lucky country is sacrosanct.

      • migtronixMEMBER

        The “regulators”. Ha ha. They’re the only reason that company hasn’t gone to 0 since the internet arrived!2

      • migtronixMEMBER

        I honestly can’t – Oh wait, kill joy alert – see how in a world of electronic betting and data analysis, the marginal rate for payouts doesn’t approach 0. If you (ahem an algo) instantly see what all the other bets being placed are, and the odds and momentum of the Delta shift in odds offered to bids covered, everyone could pretty much place perfect bets every time….

        Yes Hedge Funds I’ll take offers…

      • Mig why would you want to work for a hedge fund when you could operate your own HF betting pool? Perhaps the money wont be there initially but there is the daily satisfaction of front-running Tom Waterhouse.

  4. migtronixMEMBER

    The latest scam unveiled by the Wall Street Journal is just the latest example of how and why all the income during the oligarch recovery has gone to, well, oligarchs.

    From the Wall Street Journal:

    WASHINGTON—A government program to rid itself of TARP investments in small banks has proved a boon to hedge funds, private-equity and other private investors, according to a new watchdog report.K

    Can’t wait for Skippy’s diatribe but I have recollection similar to Krieger’s – I remember a bunch of people of in London that month (10/08) declaring capital markets dead and in bewildered disbelief that the West – victors of the Cold War – were entering the realm of central planning.

    It took me about a year – late 09 – to see what they meant, and yes indeed they were the types Skippy will deride as “libertarians”. Well, I’d rather listen to some who is right than someone who points to anthropological vagaries.

    http://www.zerohedge.com/news/2015-01-29/occupied-wall-street-%E2%80%93-latest-tarp-taxpayer-screw-job-revealed

    • Yes mig-i….

      The libertarian holo deck built by the corporatist, set the playing field for this whole episode. Pre GFC most free market libertarians were quivering in orgasmic joy over Laissez-faire obvious galactic victory over the forces of ev’bal collectivists.

      You just seem to have not gotten the memo about libertarian social strata aka pecking order, see Citizens United. Not to worry tho’ soon ruby free market members [day traders et al] will be able to take the pilgrimage to Chicago and prostrate themselves before Milton’s statuesque likeness, in the park near UofC.

      Whispers of Obama’s presidential library near it, or it might go near Wall St. somewhere in Manhattan.

      Skippy… don’t forget to read your Gary North bed time story before bed time… sweet dreams…

      • Yes I agree you are predictable mig-i.

        Typical actually for those that relinquish their cogitative ability to esoteric opines out of antiquity, short cuts and tribalism is a feature for some.

        Its been quite the thing to watch these decades, especially the last, and its effects on the puritans, you are a puritan at heart.

        The best part is those that once openly embraced their authors are now claiming to have nothing to do with them or engaging in time travel to seek Locke et al.

        Locke was a whig lulz. “Human nature and God’s purposes

        According to Locke, God created man and we are, in effect, God’s property. It is God who determines how long one of his creatures will continue to exist in his world, thus suicide is unacceptable. The chief end set us by our creator as a species and a s individuals is survival. A wise and omnipotent God, having made us and sent into this world:

        …by his order and about his business, they are his property whose workmanship they are, made to last during his, not one another’s pleasure: and being furnished with like faculties, sharing all in one community of nature, there cannot be supposed an y subordination among us, that may authorize us to destroy one another, as if we were made for one another’s uses, as the inferior ranks of creatures are for our’s.”

        “THE STATE OF SLAVERY

        The state of slavery is one much we will examine in detail in the next unit. At this point we might say that in cases where the unjust aggressor is defeated in war, the just victor has the option to either kill the aggressor or enslave them. Slavery is the state of being in the absolute or arbitrary power of another. Locke tells us that the state of slavery is the continuation of the state of war between a lawful conqueror and a captive, in which the conqueror delays to take the life of the captive, and instead makes use of him. This is a continued war because if conqueror and captive make some compact for obedience on the one side and limited power on the other, the state of slavery ceases. The reason that slavery ceases with the compact is that “no man, can, by agreement pass over to another that which he hath not in himself, a power over his own life.” (II. 4, 24) ”

        Skippy…. nice mental palate you got there mig-i…

      • @Pft007…

        For epic fun don’t forget the Dalai Lama announced his Marxist leanings last summer in Minneapolis.

        Skippy… ahhh… man is born into scarcity… hijinks ensue…

      • Yeah Pft007….

        Its like some crazy metaphysical fruit fly series run using LSD….

        Skippy…. or Life of Brian on 30X FFwd….

  5. THOUSANDS GATHER IN LONDON TO PROTEST AGAINST LACK OF AFFORDABLE HOUSING … WITH VIDEO … THE GUARDIAN

    http://www.theguardian.com/society/2015/jan/31/hundreds-gather-london-march-for-homes-protest-city-hall-affordable-housing

    THE MARCH FOR HOMES brings together campaigners, tenants and trade unionists to demand building of council homes and curbing of private rents … read more and watch video via hyperlink above …

    2015 11th ANNUAL DEMOGRAPHIA INTERNATIONAL HOUSING AFFORDABILITY SURVEY

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

    Demographia Survey Media Reporting & Commentary Search

    https://www.google.co.nz/?gws_rd=ssl#q=demographia&tbm=nws