Global Markets Overview – 2/18/14

Central banks of the East to govern trade

The positive equity momentum of the past week remains robust. Having now turned positive for the first time in 2014, the ASX is now 30 points in the black year-to-date as the US markets snap back from their New Year slump.

The S&P has experienced its worst start to a year since 2009, and the worst start to a February since 1933, yet it now finds itself breaking even (remember the US markets were shut last night for President's Day, so figures are from Friday's trade).

Today's session will be governed by three major events; first and foremost will be BHP's results. Will its first-half numbers finally see cyclical stocks breaking out of the trading ranges ($32 to $39)? It has been stuck in this medium-term range for three and half years when it dropped below $40 on the back of the Japanese tsunami and then the beginning of the Eurozone debt crisis in 2011, and it has not crossed this mark since. At $38.02 it has every chance of breaking out if the iron ore and petroleum divisions outperform.

The other events that will drive the markets today will be the statements from the central banks of Japan and Australia. Currency markets have been reacting in very sharp swings on central bank sentiment. Central bank governors around the world have been laying out their views on their respective economies and currencies for 2014 over the past month, which has lead to big moves across the G10. The Bank of England's Mark Carney has certainly ignited bullish sentiment for the GBP as his board moves to a hawkish stance on rates and a positive view on the British economy. The Fed on the other hand is actively moving the USD higher on the unwind of monetary stimulus.

The BoJ however is doing the complete opposite; as the most dovish central bank in the world, this morning's BoJ press conference will be interesting as there have been signs of life in inflation - its number one mandate for the stimulus program.

However, considering Governor Kuroda is searching for 2% inflation inside two years, the current pace of inflation is starting to fall behind the rate required to reach this goal. The yen bears are therefore hoping to hear about possible negative rates and the ramping up of further stimulus measures to see the yen really slide, and well past parity at the conference today. Considering the mixed earnings season seen on the Nikkei, this theory is understandable; however the feeling in the currency world is that Kuroda played his hand in one shot.

Since his original stimulus program that began in May last year, there has been a sense that he used everything the BoJ had and then some. Therefore there is no room to move for the BoJ; this may mean that come the release of the cash rates and the statement today, all policy calls will remain on hold and no new stimulus will be given. This leaves the JPY at the mercy of currency traders, and if the market believes the BoJ has exhausted itself, it will start to speculate that the inflation goal is unachievable - watch of very jittery trading on the release.

The other central bank news that will drive currency markets is the RBA's monetary policy minutes. There has been plenty of speculation about how 2014 will operate as bull and bears debate the likelihood of rate hikes.

Since the dropping of the easing bias at the February 4 meeting, the AUD has moved four cents and back into the 'uncomfortably' high range the bank had been pointing to as a reason to hold the line on rates.

The minutes today will give more colour as to what is meant by 'rates to remain stable' over the coming year. The neutral call has not helped the AUD, but the fact that inflation in the January month was at 2.7% - the upper-end of the comfort zone - it does make it hard to see the bank shifting rates lower.

However, there is a possibility that the inflation read was heavily affected by food, fuel and liquor as the festive season filtered through the data, which is what several investment banks are mindful of. If CPI falls back to 2% to 2.3% over the coming months, this will alleviate the pressure the bank is currently trying to manage and should take pressure off the AUD.

Ahead of the Australian open

Currently we are calling the market up 12 points on the 10am bell (AEDT) to 5394 - a level not seen since November 18 last year. With CBA now trading without its dividend, the cyclical plays will be the ones to drive the market higher on speculation of better-than-expected earnings. Watch for moves in WES, STO, WPL and FMG which are all out this week.

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