IG Markets Morning Prices

The Australian market looks set to follow the US lead today with the ASX 200 called to test 4500 on open. Following on from the strong momentum in the market on Friday gains should be broad based, although like Friday we could see cyclical and risk associated stocks outperforming.

The US market on Friday traded cautiously until the European bank stress test came out, however once traders had made up their mind that the results were reasonably positive buying once again resumed and the S&P shot up from 1090 half way through the session to close at 1102, a gain of 0.8%. GE increasing its dividend and extending their share buy-back also helped.

It took a while for traders to warm to the EU stress tests which ultimately found that 7 of the 91 banks tested need additional capital. The total amount these banks needed to raise is 3.5b euro's which is well below the shortfall of 30-90b euro's the market had forecast. Whilst we saw the Euro head higher after initial weakness and US treasury yields also gain some market participants saw the exercise as nothing short of a PR exercise, saying they simply were not stressful enough. What matters though is that the biggest and most talked about event risk is out the way and the Australian market looks set to open higher today.

Looking at the S&P sectors, we saw good gains in the industrial and material space. BHP looks set to open just above a$40 with the ADR pointing to a 0.8% gain on open, Rio Tinto also fared well with a 2.6% gain on its US listing.

Banks as well look set to be supported with the S&P financial sector closing up 0.8%.

The highlight of the week will no doubt be the easily awaited CPI print on Wednesday (see the week ahead calendar). The RBA recently flagged in its minutes that the European stress tests and the CPI print would be key in determining whether they looked to raise rates by 25 basis points in August. As it stands economists are looking for 1% growth on the year and 3.4% for the second quarter, if the number is hotter than forecast expect the Australian dollar to gravitate to and perhaps above 90c. Given the market is only pricing in a 26% chance of a move in August by the central bank, the CPI could see some volatility in the currency this week.

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