Global Markets Overview - 4/23/14

CPI - rate hikes and AUD expectations

The light Easter trading continued in Europe and the US overnight. The Easter mergers and acquisitions dance also continued as drug maker GSK traded its cancer division to Swiss competitor Novartis.

The US has now had its best north print run since September last year, with six positive prints in a row. The US earnings season continued to roll on with the 74% average of beating consensus estimates on the EPS line remaining firm - all positive leads for the local market.

What will be interesting today is how much of an effect the Australia CPI print has on the local equity market, and most importantly the AUD. Year-on-year inflation expectations sit at 3.2% - 20 basis points above the 'comfort level' of the RBA inflation range. Now the RBA normally points to the trimmed mean CPI print as a clearer picture of inflation as it removes the large fluctuations in items such as food and energy, however the consensus estimate for the trimmed mean read is 2.9%.

Will the CPI prints be another tipping point for the larger economists out there to change their expectations on rates once more? There are still two major economists calling for a rate cut come the end of the year; most have moved to neutral with a hike possibility in the first quarter of 2015, but will the print bring those expectations forward? Will the CPI print be strong enough to influence enough to start calling for rate hikes?

It also puts AUD forecasting in play; yesterday the CBA changed its AUD forecast to the complete opposite of the medium and forward estimates. The bank has reversed its forecast for the AUD, raising its expectations in the fourth quarter of 2014 to 97 cents and in the first quarter of 2015 to 99 cents. The medium average is 89 cents and 87 cents over the same periods.

With Janet Yellen clearing up any misconception about when the Fed funds rate will move the USD rise over the past six months has slowed considerably and has left risk currencies room to appreciate. The USD certainly has an investment case and on a medium-term view USD appreciation is likely. However, the short term, with signs of an east coast recovery in housing spending and credit coupled with exporters beating expectations, has the AUD on the positive side of the equation; the addition of a rate hike tips the scales even further in its favour.

Ahead of the Australian Open

Woolworths continued on its technical break-out trade reaching another record all-time high and record-closing high. Volumes remain robust in the conglomerate and the trade looks set to continue this morning. Joining WOW on record all-time highs was ANZ and WBC; both are approaching their first-half number briefs and those chasing yield and the prospect of record profit continue to pile in.

Woodside Petroleum also maintained its trade momentum, adding a further 2.2% to $40.88; again momentum is behind the stock and it is likely to see it heading higher once more.

We are currently calling the market higher to 5502 on the 10am bell (AEST), which is one point from the six-year intraday high on April 10 of 5503.5. Volumes will remain light as most traders in Australia will have taken extended leave for Easter and ANZAC day; the calls will also be affected by the CPI print.

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