dollars
A U.S. dollar note (bottom) is pictured alongside other currencies including (L-R) the Australian Dollar, Singapore Dollar, Korean Won and China's Yuan in this picture illustration taken in Washington, October 14, 2010. Reuters/Jason Reed

The red is back

Data, sentiment or general market malaise could be pointed to as reasons for the sell-off across Europe and the US.

From where I sit, data is the clearest reason for the sell-off in US markets. The ISM price and manufacturing indices were below consensus and the price index shows inflation expectations falling, putting a question at the feet of the Fed.

The issues around Brent and other commodities are also growing; sluggish data and a demand-side that is evaporating by the day are clearly impacting commodities prices.

There are very interesting stats developing in the current market.

What’s spiking my interest

· Brent fell to the lowest level since January overnight as supply-side continues to dominate the equation. Iran announced it is set to boost production the instant sanctions are lifted, while the Chinese manufacturing data from Saturday and yesterday suggest the demand-side will remain sluggish. Asian energy sectors are going to see a lot of hurt today as the supply-side dilemma is only going to get stronger in the short term, pushing prices lower still.

· Copper lost a further 1.7% on the LME to US$5142 a tonne and CME copper fell to US$2.34 a pound (-0.96%). According to Morgan Stanley, high-cost producers are seeing margins underwater at US$2.40 a pound (or lower) as the copper price crosses into production cost. The saving grace for Australian copper producers is the AUD but it doesn’t bode well for the start of FY16.

· Nickel lost 2.76% and zinc was down 0.92%. Coupled with the oil and copper story, this saw Bloomberg’s commodities index falling to its lowest read since 2002. Bloomberg’s largest mining stocks index fell to a 2009 low on the back of the slump in the London listing. South32 is the stock to watch in response to the collapse in nickel and other non-core industrials; it has lost over 29% since the high May 25 high.

· China’s manufacturing data yesterday was the lowest manufacturing read for small and medium enterprises in over two years at 47.8. The interesting development was the fact Asia didn’t react to this figure in any sharp or form. In fact, if anything, Chinese indices rallied and the AUD also shifted higher. The reaction in Europe and the US, however, was in stark contrast and sent China-facing sectors down 1% or more.

· Iron ore recouped all the losses from Friday’s close yesterday, adding 4.12%. However, this was foreshadowed in the Dalian futures yesterday, which were up over 3.8% yesterday. This may stave off a stronger-than-expected sell-off in the mining stocks but the upside may already be priced in.

RBA rates day

Since 7 July:

· AUD/USD has lost 2 cents and the TWI AUD is down 1.7% over the same period

· The best performing currency over the same period is GBP, up 3%. The EUR is up 1.7%.

· The spread in the 2-to-10 bind curve has lost 16 basis points, to 84

· The ASX is up 1.8%

· Iron ore is up over 14%

What the market is pricing

· The interbank market has a 11% probability of a cut today (most likely hedging in case of a surprise).

· 24 economists see no change.

· With the Statement of Monetary Policy (SoMP) on Friday , the press statement may not cover all aspects of what we expect to see: growth and inflation expectations for the remainder of the calendar year.

However, we do expect to see more recognition of the commodities slide, the Chinese economic developments and risks in the global economy. The previous two statements have been very domestically focused (for obvious reasons) but we need to gain some understanding of the Bank’s position around the global conditions.

· The trade balance today will give a clearer understanding of the impact the commodities slide is having. The iron ore, copper and coal trade figures will be the key component of the export figure today and a key part to investment decisions in the materials sector. We know record shipments have been leaving Port Hedland. The return, however, is more important and the bulk figures will give a read to the state of play in the local economy.

Ahead of the open

Ahead of the open, we are calling the ASX down seven points to 5672. However, with the retail sales figures as well as the trade balance due at 11.30am AEST then the RBA announcement at 2.30pm AEST , there is plenty of data to push the currency and the index around today.

Reporting season sees Suncorp releasing full year numbers today. Figures to watch: cash profit of $1.14 billion, a total dividend of 51c (a special dividend of 20c is expected on top of the 31c final dividend) and net interest margins for the banking division of 1.85%.

Asian markets opening call

Price at 8:00am AEDT

Change from the Offical market close

Percentage Change

Australia 200 cash (ASX 200)

5,672.10

-7

-0.13%

Japan 225 (Nikkei)

20,495.60

-53

-0.26%

Hong Kong HS 50 cash (Hang Seng)

24,256.70

-155

-0.63%

China H-shares cash

10,978.70

-31

-0.28%

Singapore Blue Chip cash (MSCI Singapore)

358.11

2

0.45%

US and Europe Market Calls

Price at 8:00am AEDT

Change Since Australian Market Close

Percentage Change

WALL STREET (cash) (Dow)

17,587.80

-100

-0.57%

US 500 (cash) (S&P)

2,097.57

-5

-0.27%

UK FTSE (cash)

6,667.40

-7

-0.11%

German DAX (cash)

11,413.60

-30

-0.26%

Futures Markets

Price at 8:00am AEDT

Change Since Australian Market Close

Percentage Change

Dow Jones Futures (September)

17,509.00

-98.00

-0.56%

S&P Futures (September)

2,090.88

-5.25

-0.25%

ASX SPI Futures (September)

5,612.50

-8.00

-0.15%

NKY 225 Futures (September)

20,507.50

-42.50

-0.21%

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

$0.7287

-0.0011

-0.16%

USD/JPY

¥124.030

-0.025

-0.02%

Rio Tinto Plc (London)

£24.53

-0.34

-1.37%

BHP Billiton Plc (London)

£11.67

-0.15

-1.31%

BHP Billiton Ltd. ADR (US) (AUD)

$25.59

-0.59

-2.26%

Gold (spot)

$1,086.50

-9.35

-0.85%

Brent Crude (September)

$49.66

-1.98

-3.82%

Aluminium (London)

1611

-9.00

-0.56%

Copper (London)

5192

-32.00

-0.61%

Nickel (London)

10760

-305.00

-2.76%

Zinc (London)

1902

-15.50

-0.81%

Iron Ore (62%Fe Qingdao)

$55.63

2.22

4.16%

IG provides round-the-clock CFD trading on currencies, indices and commodities. The levels quoted in this email are the latest tradeable price for each market. The net change for each market is referenced from the corresponding tradeable level at yesterday’s close of the ASX. These levels are specifically tailored for the Australian trader and take into account the 24hr nature of global markets.

Please contact IG if you require market commentary or the latest dealing price.

EVAN LUCAS Market Strategist

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