The Bull

Tuesday 25

November, 2014 4:39 AM

Industry Chart

Afternoon Thoughts

Afternoon Thoughts

There will certainly be a number of money managers outperforming benchmarks

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By Expert Panel 24.11.2014

Chris Weston, Research Analyst, IG

There will certainly be a number of money managers outperforming benchmarks wishing that the year would end abruptly so they could lock in performance. Still, there is much water left to flow under the bridge, so traders need to stay vigilant.

There are five weeks to Christmas and six to the New Year, but traders still have to navigate through the lower liquidity and the raft of December event risk. Here we get the ECB meeting (4 December), the second Targeted Long-Term Refinancing Operation (11 December) and the Japanese election (17 December); plenty for macro-focused traders to watch.

On a pure stock level, most of the focus here in Australia has been on the Medibank float and the best strategies to play on the commencement of its listing tomorrow. Seemingly retail has been given a free 7.5% (or 15 cent), but it seems that A$2.40 could even be seen tomorrow; if one can offload some of the stock around here it would be a 20% profit and on current projection tied in with stretched valuations. Naturally not everyone will be looking to stag the open, but it seems likely that the stock will open around the A$2.30 level in my opinion.

Our grey market traded by clients suggests the stock will close the day at A$2.23.

Elsewhere these thoughts are getting the lion’s share of attention on the trading floors today:

·         China has signalled its intent to meet its growth targets with the asymmetric cut to both the deposit and lending rate on Friday. It is now widely expected that the PBoC will ease again in the New Year, while continuing with the use of more targeted reserve requirement ratio (RRR) cuts and the use of its temporary liquidity facilities. This move is predominately to lower refinancing costs for businesses that qualify for borrowing at benchmark rates, but mortgage payments should also ease by around 3%.

·         Predictably resource stocks have flown today, with the market taking heart that China has stepped its easing actions to be more in-line with many other Western economies. The various China mainland equity markets have moved higher, despite the actions being negative for banks margins, while iron ore futures have moved 2.1% higher today which is giving some substance to the buying.  Reasonable volume has been seen in names like BHP, RIO and FMG.

·         The PBoC lifted the mid-point in its daily ‘fix’ operation today by 33 basis points suggesting the CNY should weaken from here. The fact that the market has carried on selling CNY (with USD/CNY up 120 pips today) suggests we could see a weakening trend from here. With producer prices falling for so long, it is now imperative the PBoC also tries to promote inflation; for corporate China to deleverage it needs end prices going up and borrowing costs to go down. The whole point of the interest rate cut on Friday was to make the process of refinancing more effective.

·         European equity markets are now attractive as an investment destination. The argument here is you can buy European market at 13x forward earnings, with around 10% earnings growth, relative to that of the S&P 500 on 16x and around 7% earnings growth. Japan is still compelling, but the key is the fact that EBIT margins in Europe are still way below the pre-GFC peak, plus Mario Draghi hinting on Friday that QE is more likely than not Europe should now really outperform.

·         This coming Friday’s Euro ‘flash’ inflation print should see inflation slow 10 basis points to 0.3%, however more importantly inflation expectations (I’ve looked at the 5y5y swap – as the ECB does) are falling. The swaps market actually ticked down a couple of basis points (or 0.02%) on Friday despite Mario Draghi’s fairly dovish comments. With the market currently suggesting inflation will be 1.78% over a five-year period, clearly the market is not enthused that QE will drive inflation.

·         All eyes on fall on 1.2358 (the November 7 low) on EUR/USD in the coming session, with spot price ominously poised to break this pivot. Those who model EUR/USD for price misalignments and so called ‘fair value’ would say the pair should be some 200 pips higher at present, so this suggests selling rallies. However, a closing break below 1.2358 would suggest riding the momentum and potentially looking for 1.2220 (the 200-month moving average and rising trend drawn from the 2005 low).

·         Spot gold has seen good two-way trade today and will continue to be heavily in focus ahead of the Swiss referendum to ‘Save Our Gold’ on November 30. Gold has many conflicting short-term inputs now; however the likelihood of the referendum being voted in on Sunday seems low. Gold however is trending higher and $1208 (the 61.8% retracement of the October to November sell-off) seems key here. A closing break should see the October high of $1255 come into play, but the melt-up seems to have started and while few seriously expect the Swiss vote to pass, it’s similar in some ways to the Scottish referendum in so much that we could have major gapping risk on Monday if the unexpected occurs.

·         Brent and WTI crude prices are also in play this week with talk that Iran is looking for a cut of one million barrels of oil per day from production. Whether Saudi Arabia or Iraq agree is another thing, but price action in oil will be closely watched and good upside could be a catalyst for EUR/USD rally.

With Asian markets pricing in the rally seen in Europe and UK, notably in the resource space, European markets will pause for breath on the open. Data centres on German business confidence, with no real change expected here. In the US we get Chicago Fed activity.

 Ahead of the European open we are calling the FTSE 6748 -2, DAX 9732 unchanged, CAC 4347 unchanged, IBEX 10516 -4 and MIB 19930 -24

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