Stan Shamu for Chris Weston, Chief Market Strategist at IG Markets
China rallies ahead of the Lunar break
With US markets closed yesterday, it was up to Europe to give Asia some direction. The latest developments from Europe have resulted in some mixed trading for Asia with the ASX 200 struggling while China is rallying ahead of the Lunar new year. While the medium-term outlook remains positive with central banks underpinning strength in equities, the near-term picture looks murky.
Greece seems to be moving further away from a compromise with Europe’s finance ministers and the fact it walked away from negotiations is not good for risk at all. Apart from Greece, the rest of the eurozone finance ministers are sounding very unified at the moment and have shown a consistent tone on Greece.
In terms of the next step now, another meeting could be held as early as Friday if Greece submits a request to extend the current programme. It seems all other options are now off the table for Greece and this will certainly put traders on high alert of an escalation of the situation. A consolation is the fact Greece’s Prime Minister has emphasised that a solution could be found in the next couple of days.
Regardless of the differences, optimists will continue to feel a solution will be reached somehow to prevent undoing all the hard work we’ve been seeing from European leaders to resuscitate the economy. The single currency has been choppy and will be on high alert this week as we head into the Friday deadline. Given EUR/USD has held up so well in Asia, there could be opportunities to sell the pair down the track with traders taking advantage of the strength.
Banks weigh on ASX 200
As is normally the case, Chinese equities are rallying ahead of the week-long break. Investors even ignored another round of worrying property price data and focused on the seasonality of the New Year period.
There has been a bit of activity in Australia, with equities pulling back from six-year highs on a variety of factors. Earnings today have been somewhat underwhelming while an ex-dividend day for CBA also contributed to weakness for the financials. While Macquarie impressed, this was not enough to neutralise the losses from the banking heavyweights like ANZ.
Just taking a closer look at earnings season thus far: 42% of ASX 200 companies have reported and out of those 59% have beaten on EPS while 40% have beaten on revenue. However, we’ve actually seen a 10.6% aggregate decline in EPS and 6.6% aggregate decline in revenue.
In terms of sectors, the materials space has seen a 36% drop in aggregate EPS and this also seems to have impacted the industrials, which are down 21%. It’s the materials that are doing well today, though, helped by China’s tailwind as iron ore prices recover heading into the New Year break. The RBA minutes also received some attention as they saw the probability of a March cut pared back to around 55% (from close to 70%).
There was some deliberation of the timing of the rate cut, which we saw in February, but given we’ve since had Glenn Stevens’ testimony and a very poor jobs release, then perhaps the minutes didn’t carry too much weight. The AUD managed to pop a bit higher on the minutes but positioning remains fairly neutral as a number of analysts and traders still expect a March cut.
Greece to weigh on Europe
Ahead of European trade, we are calling the major bourses weaker as the latest headlines on Greece take a toll on sentiment. As a result, it’ll be a headline-risk-driven environment in coming sessions. If they don’t knock anything up by Friday, the risk-off trade could be very much alive. Key markets such as the DAX remain in very good stead and I suspect any deep pullbacks will be used as buying opportunities. The fundamentals in Europe have actually been improving and data has shown signs of bottoming.
On the calendar today we have the ZEW economic sentiment reading to look out for. In the UK we have CPI data and it’ll be interesting to see how this plays out, given the upbeat assessment provided by the BoE last week in its inflation hearings. The US will also return to trade today and, given data is limited, markets there are also likely to follow Europe’s lead.