Global Markets Overview - Feb. 18, 2016

We are calling for an open of 4944 (+62 points or 1.3%) for the ASX 200 and closer to 5000, where the index has found good sellers since 8 January . In terms of price action, the last few days has seen the ASX 200 roll over after the first half hour, so given the strong moves in US and European trade perhaps we will see stocks supported from the outset. Naturally Japan and China will play a role on semantics and a lower USD/CNY ‘fix’ from the PBoC (at 12:15 AEST ) could be another positive catalyst, with Australian (January) employment also being a consideration. The Nikkei looks also set for a positive open (IG call is for 16059), but I question how local investors will react to the front page news of the Nikkei publication, quoting Shinzo Abe as ruling out stimulus for now.

Offshore markets find their mojo

· The S&P has rallied over 1% for three straight days, a fate we haven’t seen since Q4 2011. The actual percentage gain is also the best three day bounce since last August.

· Participation and breadth has been strong and while the S&P 500 has rallied from the double bottom low of 1810 (on 11 February) we have seen the percentage of companies above the 20-day average increase from 28% to 75%.

· All eyes on the 29 January high of 1940 (in the S&P 500), a break here would be very positive.

· US January industrial production increased 0.9%, 50 basis points above consensus, with capacity utilisation looking strong.

· The US yield curve (2-year treasuries versus 10-year treasuries) steepened to 107 basis points with reasonable selling across the curve. US banks subsequently look strong and a clear reason why credit default swaps (CDS) spreads on Citigroup and Morgan Stanley have come in nicely. CDS insuring Macquarie and the big four Aussie banks debt have also come in too.

· Europe looks even stronger, with an 8.5% gain since 11 February in the Eurostoxx 50. The percentage of companies above the 20-day moving average has increased from zero (from the 11 February low) to now stand at 54%. The percentage of stocks at 4-week lows has fallen from a staggering 72% to just 2% at present. The European financial sector ETF (EUFN) has rallied 9.4% in this time.

· The FOMC minutes haven’t really given traders any new colour and it’s no surprise that many ‘member saw downside risks’. There has been no reaction in the June Fed funds future and markets are still only pricing a 12% chance of a further hike by June and 36% by December.

Considerations for Asia today

· It should be a perfect storm for the equity bulls today with BHP’s American depositary receipt suggesting the stock will open 5%+. The Australian banks should recoup some lost ground too with solid gains, as will energy names (US crude is up 5.4% from the ASX cash close).

· The key will be how the ASX 200 acts around 5000 as the market has found good sellers here in 2016.

· Participation in the ASX rally has been pretty good too, with the percentage of companies making a four-week low falling from 40% to 5% in the recent rally from 4706. The percentage of companies above the 20-day has increased from 25% to 47%, showing good participation in the move higher. Naturally this percentage will increase once the market is up and running.

· Australian February employment data is due at 11:00 with consensus (for what it’s worth) calling for 13,000 net jobs created (range +40k to 30k), with the unemployment rate at 5.8%. GBP/AUD getting attention as it smashed through AUD2.00. AUD/USD is eyeing a move into the February swing high above 72c.

· Goldman Sachs are now forecasting the Reserve Bank to cut rates by 50 basis points this year (May and June) and this should get some attention. The swaps market are currently pricing in one cut and a 32% chance of a second.

· Aussie corporate earnings come from: SYD, TLS, ORG, AMP, TWE and TTS. So far 45% of companies have reported 1H16 earnings with 60% beating on EPS and 64% on sales. In the prior half this figure stood at 52% and 48% respectively.

CHRIS WESTON
Chief Market Strategist
IG, Level 15, 55 Collins Street, Melbourne VIC 3000
D: +61398601758 | T: +61398601711
www.ig.com

IG Markets

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