Global Markets Overview - Feb. 12, 2016

Another night of ultra-high drama, but the wash up is we are staring at another negative open, although sentiment has picked up somewhat as we eye Asia trade.

The ASX 200 looks set to open at 4786 (-0.7%), with our call moving from around 4744 in the last hour or so. Banks will likely to be down around 1% on open. BHP and RIO will also both struggle, with RIO really opening the door for BHP to also move away from its progressive dividend at its on 23 February earnings report. BHP is in strong relative health with gearing of 24% and net debt to EBITDA of 1.45X, but with the company on negative credit watch and spot commodity prices at such depressed levels the current dividend policy is clearly unsustainable.

Japan’s cash market re-opens after being closed yesterday for Foundation Day and is eyeing a 500 point drop on open. Futures were open yesterday, but the focus was and still very much is on USD/JPY which has rebounded strongly from a low of ¥110.99. There is no bones about it, the moves in this pair are nuts and the big concern here is that the Bank of Japan have pushed Japanese pension funds offshore in the hunt for returns, but these funds have largely deployed cash unhedged. So with the JPY rallying significantly the translation effect on expected return is very negative.

To put the volatility into perspective USD/JPY has traded in a 1070 pip range in 2016, which is 70 pips wider than the entire range of 2015 and we are only in the middle of February!

Hong Kong opened yesterday with the H-share market hitting the lowest level since 2003, while the Hang Seng also printed a new low. Both markets are trending firmly lower and breaking key support levels and this simply has to be respected here and we are not at a level where I see mean reversion just yet. Watch price action in these markets today, as I would expect any rallies to offer the bears a gift.

The leads for the Asia have once again centred on European banks and shenanigans in the oil complex. Moves from the Swedish central bank to cut its deposit rate to -50 basis points (from -35bp) was certainly more aggressive than expected (I had envisaged a move to -45bp), rattling traders as the moves have been taken as a pre-cursor to action from the ECB at its 10 March meeting. As we have seen in recent times, the idea that central banks are now fully targeting the interest rate structure and putting a gun to domestic banks heads in a fight to stoke credit growth is in no way an equity friendly story. European banks were smashed again, with credit-default swaps ballooning. The irony being the Federal Reserve still feel that if they have to they could push short-term rates below zero and the markets would stabilise. Price action in markets would suggest otherwise.

This deteriorating sentiment will once again weight on Australian and Asian banks.

US crude has just been all over the place, trading to $26.05 before finding some support on speculation the United Arab Emirates have detailed that OPEC are ready to corporate and cut production. There is much debate how realistic this headline is, but it is not the first of this nature and a few short positions have closed as traders really don’t want to be in too bearish a position if the news does actually eventuate. If traders actually hear news of OPEC and non-OPEC working together to support prices then global equities will stage a huge rally. That’s a big ‘if though.

Certainly this speculation has supported the S&P and other US bourses and as mentioned our ASX 200 calls have responded. An open at 4786 would still see the index down 3.8% for the week and if we look at both market internals (number of stocks above key moving averages, percentage of stocks making 4-week lows) we are not at a level where I would have any real conviction of mean reversion. I see that level closer to 4650 to 4600 in the short-term.

Gold stocks should continue to work and one has to look at the gold ETF (GLD) which closed up 4% on volume 4.4 times the 15-day average. Unbelievable stuff!

Asian markets opening call

Price at 8:00am AEDT

Change from the Offical market close

Percentage Change

Australia 200 cash (ASX 200)

4,786.10

-35

-0.7%

Japan 225 (Nikkei)

15,227.90

-485

-3.09%

Hong Kong HS 50 cash (Hang Seng)

18,166.20

-380

-2.05%

China H-shares cash

7,496.00

-162

-2.11%

Singapore Blue Chip cash (MSCI Singapore)

284.58

-1

-0.22%

Futures Markets

Price at 8:00am AEDT

Change Since Australian Market Close

Percentage Change

Dow Jones Futures (March)

15,614.50

-182.00

-1.15%

S&P Futures (March)

1,824.63

-14.25

-0.77%

ASX SPI Futures (March)

4,730.00

-37.00

-0.72%

NKY 225 Futures (March)

15,247.50

-197.50

-1.28%

Key inputs for the upcoming Australian trading session (Change are from 16:00 AEDT )

Price at 8:00am AEDT

Change Since Australian Market Close

Percentage Change

AUD/USD

$0.7094

0.0001

0.01%

USD/JPY

¥112.410

-0.295

-0.26%

Rio Tinto Plc (London)

£17.06

-0.59

-3.34%

BHP Billiton Plc (London)

£6.34

-0.20

-3.01%

BHP Billiton Ltd. ADR (US) (AUD)

$14.94

-0.30

-1.99%

Commonwealth Bank ADR (US) (AUD)

$73.55

-0.75

-1.01%

Metals Exchanges (Change are from 16:00 AEDT )

Price at 8:00am AEDT

Change Since Australian Market Close

Percentage Change

Gold (spot)

$1,246.40

38.34

3.17%

Brent Crude (April)

$30.78

0.09

0.28%

Aluminium (London)

1484

0.00

0.00%

Copper (London)

4443

-21.00

-0.47%

Nickel (London)

7580

-335.00

-4.23%

Zinc (London)

1709

6.50

0.38%

CHRIS WESTON
Chief Market Strategist
IG, Level 15, 55 Collins Street, Melbourne VIC 3000
D: +61398601758 | T: +61398601711
www.ig.com

IG Markets

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