Stan Shamu, Research Analyst, IG
FTSE 6769 -10
DAX 9326 -8
CAC 4250 -4
IBEX 10373 -14
MIB 19640 -4
Gains seen in European and US trade haven’t been replicated in Asia with some mixed performances across the board. Perhaps there is a bit of caution heading into the FOMC meeting minutes due to be released at 4.00am AEST. Strong US housing starts and building permits data helped arrest some of the concern around vulnerabilities in the housing market. This set up equities for some decent gains, which was a bit of a surprise considering good data has been bad for equities of late.
Additionally, heading into the business end of the week for the US economy I would have expected to see a bit of caution. While an all-out hawkish bias is unlikely, the fact that Philadelphia Fed President Charles Plosser dissented in the last meeting will have traders on high alert.
The Fed turned moderately more hawkish on the inflation and unemployment references. As a result, analysts now feel the minutes could reflect an internal dialogue that to some extent reinforces a less accommodative focus. The minutes also allow the non-voters a chance to have their say and many are calling for short-term rates to be raised sooner. This will put the US dollar firmly in play and could weigh on equities heading into Jackson Hole.
USD in focus ahead of minutes
With the greenback in focus, USD/JPY has been one of the more interesting pairs to watch in Asian trade today. The pair is back above the 103 level and has broken a downtrend that has been in place since December last year on the weekly chart.
There is potential for this pair to extend gains, given the greenback is carrying a bit of momentum at the moment. After a lacklustre early trade, the Nikkei has also started responding to USD/JPY gains. Japan’s equities will be one to watch this week with the potential for further USD strength.
Markets in China are relatively flat but keep in mind the Hang Seng is at its highest since 2008 and trading above 25,000 while the Shanghai Composite is at its highest since December last year. In China tomorrow we also have the HSBC flash manufacturing PMI reading, which carries a bit of weight at the moment given the poor run of data we’ve seen out of China lately. Perhaps this is driving the cautious tone.
Materials drag while banks excel
The ASX 200 had to come from behind after a sharp drop in BHP Billiton at the open weighed on the index. In fact, the whole materials space has been quite lacklustre today with weakness in iron ore and gold proving a drag on the overall market. While BHP’s results have been well documented by now, it seems analysts remain split on the investment case and the future of the company. There have been quite a number of downgrades by brokers to neutral/hold already.
The general consensus is that, as a short-medium term investment (particularly with the lack of capital return), it is perhaps not the best place to be. But there could be plenty of value to be unlocked in the long term.
Results have been a mixed bag today with the bright spots being Wesfarmers and Woodside Petroleum. Once again it was capital return to shareholders that did the trick as WES was well received today.
Euro and pound under pressure
Looking ahead to European trade, the major bourses are facing a mildly weaker open. Even more interesting perhaps is the vulnerability we are currently seeing in the euro and the pound, particularly against the greenback. EUR/USD is down to November 2013 lows and cable is down to April lows.
A benign CPI reading in the UK set the tone for further weakness in the sterling. We’d seen it pick up some ground on Monday on the back of Mark Carney’s comments, but this gave sellers an excuse to short the pair again. Later today focus will be on the BoE MPC meeting minutes, where the market will be looking for any signs that some members are getting hawkish.
While this is unlikely, Mark Carney’s recent remarks seem to have put some doubt in traders’ minds. The pair is now just shy of 1.6600 – not far off April lows – and is also now firmly below its 200-day moving average. Due to the fact the pair appears oversold, I would prefer selling on strength, particularly closer to the 1.6700 mark.