Commodities, EU Markets, Asia-Pacific Markets Insights - 26 April 2013
FROM IG MARKETS CHRIS WESTON, Chief Market Strategist:
The commodity trade came back with a vengeance today, and whether this is one-day affair or the start of something more compelling, we have seen traders taking shorts off the table, and many putting on new longs.
CME Copper looks interesting and while the February downtrend is intact, a break of $3.35 (the 38.2% retracement of the January to April sell-off) should see a move back to $3.50 materialise. Talk that China is back in the market as the end-buyer seems to be the supporting factor; while a fall in US jobless claims would not have hurt either.
Gold continues to find buyers and has retraced over 61.8% of the losses seen in the two-day liquation from $1564 to $1321. The prospect of emerging market central bank buying and strong physical demand has put a bid in the market and reminded everyone that it's not all about speculators.
We feel there are still upside risks in the short-term, but given trend and momentum indicators are still painting a negative outlook, we'd think about shorts around $1503 (the 31.8% retracement of the October to April sell-off), with stops at $1560.
ASIA-PACIFIC MARKETS
Asia has been all over the place today and while the open showed promise, as the day grew on sellers came into the market. The ASX 200 was buoyed early and hit a high of 5135, eyeing the 12 March high of 5164, although it drifted lower into the afternoon as the Nikkei came off.
AUSTRALIA
M&A activity, with Graincrop agreeing to a $3billion bid from Archer Daniels will always help sentiment and was a factor in the AUD/USD hitting 1.0337.
The standout sector was clearly the materials space which rallied 2.3%, factoring in commodity prices from Wednesdays close. Financials took a backseat today, although next week the sector should take back centre stage with ANZ, WBC and Macquarie detailing half-year results, with expectations that we should see some reasonable growth to cash earnings (ANZ 11%), while dividend increases should be more modest for ANZ and Westpac at around 3% (15% for Macquarie).
JAPAN
Japan has been relatively well contained today and although expectations were low going into the BoJ meeting the bank delivered very little indeed.
The only thing they mentioned was that they were targeting the monetary base, but that is it and clearly we already knew that. USD/JPY fell as a result to 98.60.
There had been talk that the bank may detail using its vast forex reserves to buy ASEAN bonds is something we may still see, while the bank will probably increase its inflation call for 2% to 2015, while also upgrading its economic forecasts. However, as things stand we haven't heard any of this yet.
EUROPEAN MARKETS
Europe is looking at a negative open and there is an interesting dynamic shaping up in the region. On one hand Angela Merkel has once again shown that while European stocks and bonds may be performing well, the divide among the seventeen nation union is as great as ever.
A cut to the ECB's refinancing rate is now the markets base case, although the impact this will have on growth is limited, (as Goldman Sachs put it), it's purely 'cosmetic'.
The ironic view held by some traders is that if the ECB doesn't cut the EUR, it could actually lose ground. The fact that the German Finance Minister Wolfgang Schauble recently expressed a view to drain the system of liquidity, this opinion also puts him directly at odds with Mario Draghi, who we feel would cut rates predominantly to incentives the banks to keep the excess liquidity on their balance sheets.
Still, the fact that Angela Merkel is suggesting that Germany would need higher rates is not new and feeds into Morgan Stanley's view that if Germany were to leave the EMU its 'fair value' EUR/USD exchange rate would be around 1.53.
While on the subject of Germany, many are expecting to see an article in the German publication Handelsblatt reporting that the Bundesbank will challenge the constitutionality of the ECB's sovereign bond purchasing programme or OMT (Outright Monetary Transactions).
The bottom line here is the bank should suggest that it violates the Lisbon Treaty, which details the ECB cannot directly fund individual governments. It appears that the German Constitutional Court will then look at both the ESM and OMT in a meeting to be held in June.
We are not going to claim to be well versed in German law, and while the views of the Bundesbank are certainly well known, it appears that the OMT will be back in focus ahead of the September German elections. It seems a logical argument that it could cause a few to sell out of Spanish and Italian bonds as the credibility of the OMT will be thrown into question.
We have already seen PIMCO taking profits on peripheral debt, so it will be interesting to see if the link between EUR/USD and Italian/Spanish bonds returns.
We feel selling rallies in EUR/USD to 1.3050 could be profitable, while short EUR/NZD also makes sense given our positive view on the NZD.
While these European concerns may play into the markets thinking it will be interesting to watch US data with Q1 GDP (expected to print 3%) and University of Michigan consumer sentiment (expected to tick up to 73.5). On the stock side, traders will be watching earnings from Chevron, Simon Property Group and DR Horton, while in Europe, BASF and Total will be in focus. Talk that Vodafone's stake in Verizon Wireless is worth $30 billion more than Verizon Communications own valuation ($100 billion) is also an interesting point.
Ahead of European open we are calling the FTSE at 6420 -23, DAX 7807 -26, CAC 3822 -18, IBEX 8325 -30 and MIB 16610 -40