Global Markets Overview – August 20, 2014

The momentum in equities has continued with further gains through European and US trade. It seems investors are still responding to downgraded geopolitical risk, with a further kicker coming from signs of improvement in the US housing market. Heading into the FOMC minutes I thought we'd actually see a bit of caution being exercised, particularly considering the developments from the last meeting where Philadelphia Fed President Charles Plosser dissented.

Additionally, 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 reinforces a less accommodative focus to some extent. This will put the US dollar firmly in play and could weigh on equities heading into Jackson Hole.

Glenn Stevens comments in focus

AUD/USD will remain in focus today with the semi-annual testimony of Governor Glenn Stevens at 9.30am AEST, where we might get a more updated view on the economy. The testimony tends to be a bit more timely than the minutes for example. The local currency was actually surprisingly strong in Asia yesterday, despite the monetary policy meeting minutes not delivering any surprises. However, today Mr Stevens gets an opportunity to comment on the labour market (in light of recent weakness), inflation and other key parts of the economy. There could also be an opportunity to jawbone the AUD and should this happen we could see renewed downside pressure for the local currency. A trade back below the 0.9300 level could see the pair trade down to retest recent lows in the 0.9240 region.

BHP to open 5% lower

Ahead of the open, we are calling the ASX 200 down 0.2% at 5611. The local market printed a high of 5644 on 31 July and this will continue to be the level to watch in the near term, particularly should US equities remain firm. While this might surprise, BHP's ADR is pointing down around 5% to 37.71 and this is likely to be the primary driver of weakness. With a market weighting of around 9%, then we can expect the mining giant to take a toll on the market at open. The headline earnings number of $13.4 billion was actually slightly ahead of estimates of $13.3 billion. However, the market focused on the $15 billion spin-off and lack of a buyback. Investors were hoping for a buyback to the tune of $3 billion, and in a capital-focused market this wasn't taken well.

Additionally debt levels are quite high and the company feels it needs to strengthen the balance sheet before committing to a buyback. Also, keep in mind there will be some uncertainty around this NewCo in the near term. This implies no capital return for a while. Overall though, the result was broadly in-line with estimates but expect plenty of downgrades.

A concern in today's trade will be weakness in iron ore and gold weighing on some of the materials plays. On the reporting front, the main ones will be Woodside, Fortescue, Wesfarmers, Coca-Cola, Brambles and Seek. There won't be as big a dividend coming out of the market in today's trade, but still a few to keep an eye on including JB Hi-Fi and Suncorp.

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