An office worker talks on his phone as he looks the stock board at the Australian Securities Exchange (ASX) building in central Sydney June 15, 2012.
An office worker talks on his phone as he looks the stock board at the Australian Securities Exchange (ASX) building in central Sydney June 15, 2012. Reuters/Daniel Munoz

CAPEX survey adds to tubby calls

We continue to look for trade ideas where we can in this market. There are plenty around, however I have been discussing in these notes over the past few months that one needs to be nimble, have clear ranges and be willing to trade both long and short positions.

I believe my ASX tubby strategy is the correct call in the current market and I simple ask myself this question: what will make the ASX get to and HOLD above 5400 points?

Bank support is the most likely reason; their size has the most influence on the index. The fundamental mover in the banks is currently asset quality (which has been proven to be strong this earnings season) and growth seeing record cash earnings.

However, the market appears to be waiting to be proven right in its belief that asset quality is declining. It has been trading banking stocks to the downside in anticipation that bad and doubtful debts are ticking up and asset quality is starting to decline, despite the February reports.

Either way, the banks look to be unable to drive the ASX to 5400 and above, however nor will they drag it under 4750 as net yields are already appealing and further falls will make that yield even more attractive. The big four (bar CBA) have grossed up yields in double digits to 2011/12 levels.

This brings me to yesterday’s CAPEX data and how it also feeds into my tubby strategy.

No matter how you cut the 2016/17 CAPEX intensions survey, the CAPEX cliff is still ever-present and shows no signs its nearing a bottom.

$82.6 billion in 2016/17 is a 23% decline from the previous survey and the lowest read in years.

It’s hugely disappointing and the survey has to bring the RBA into play as the federal government is unlikely to add stimulus spending, even though it’s an election year. This means Martin Place will have to do the heavily lifting to try stimulate growth in the Australian economy.

Interestingly, the Interbank banks were rather unresponsive to the figures. The March, April and May markets only added a 2% chance in each month for a 25 basis point cut to eventuate.

This low movement may be explained by Australian bonds yields currently at cheap prices and corporate borrowing already at record low levels, yet not seeing increases in borrowings.

This is the main issue facing the RBA. Further cuts may not provide the incentive for further corporate spending. Instead, it may spur on additional residential borrowing – something it’s trying to avoid.

The CAPEX survey is a conundrum for the RBA and the Australian economy, and it further strengthens point two of my ASX strategy.

The ASX ‘tubby’ strategy

Strategically, the ASX’s 2016 path has a distinctly ‘tubby’ and ‘squat’ profile – a historically wider trading range (tubbiness) with relatively low aggregated capital growth (squatness).

The ASX has suffered from this for the past 7 months; the Chinese devaluation in August has seen this ‘stout’ and ‘tubby’ strategy becoming ingrained as the short term norm.

Where to from here?

One of two things may happen:

1. Markets (ASX included) will collapse and become fundamentally ‘cheap’ – the six and half year bull market only ended six months ago, the correction in January had distinct characteristics of being overvalued in the current cycle and is looking for structural weakness.

2. Markets will remain volatile and trade in a directionless manner with a tubby and stout 2016 profile. Macroeconomic fundamentals, the oil price and inflation will leave markets in a state of flux if it doesn’t break down.

What’s more likely?

Three things that we have noticed in these first weeks of 2016:

· Correction in January was based on one of the bigger fears in macroeconomics – an emerging markets crash, with China as the driver. Macroeconomists see the financial crisis as a three-pronged event, starting with US sub-prime, then European sovereign crisis, and followed by EM devaluations and capital outflows.

· Earnings, while ahead of market expectations to the EPS line (beating 55% of the time for the ASX its slightly better for the S&P), have declined half on half (or quarter on quarter) with the majority of 2016 guidance releases being ‘cautious’ to ‘negative’ due to ‘uncertain conditions’.

· The rebound over the past 10 days appears to be positing rather than a fundamental change in the underlying markets – the ASX particularly has a structural ‘fear’ trade which is why I see volatile range trading as a more likely scenario due to the fact that banks and materials control its direction.

On the financial side of the ASX, banks are under sustained pressure. This is due to ‘being overvalued’, ‘housing bubbles’ and ‘lower growth’.

On the materials side of the ASX, firms are mere shadows of their former selves. This is due to cyclical bear markets in commodities, emerging market demand evaporating and cost out strategies being initiated.

The trade

With this as a base, my strategy for the ASX is trading a ‘tubby’ and ‘stout’ movement with a possible capitulation trade as the end game. A break below the February 10 level means that ASX is moving towards its ‘fundamentally cheap price’, however it’s more likely it will range trade until the end of the financial year.

Asian markets opening call

Price at 8:00am AEDT

Change from the Offical market close

Percentage Change

Australia 200 cash (ASX 200)

4,904.70

24

0.48%

Japan 225 (Nikkei)

16,276.20

136

0.84%

Hong Kong HS 50 cash (Hang Seng)

19,218.70

330

1.75%

China H-shares cash

8,026.40

154

1.96%

Singapore Blue Chip cash (MSCI Singapore)

295.84

3

1.09%

Futures Markets

Price at 8:00am AEDT

Change Since Australian Market Close

Percentage Change

Dow Jones Futures (March)

16,667.00

192.00

1.17%

S&P Futures (March)

1,949.88

19.50

1.01%

ASX SPI Futures (March)

4,870.50

23.00

0.44%

NKY 225 Futures (March)

16,260.00

97.50

0.60%

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

$0.7238

0.0066

0.91%

USD/JPY

¥112.985

0.500

0.44%

Rio Tinto Plc (London)

£18.40

-0.34

-1.84%

BHP Billiton Plc (London)

£6.93

0.09

1.27%

BHP Billiton Ltd. ADR (US) (AUD)

$15.77

-0.23

-1.43%

Commonwealth Bank ADR (US) (AUD)

$71.15

0.15

0.21%

Metals Exchanges (Change are from 16:00 AEDT )

Price at 8:00am AEDT

Change Since Australian Market Close

Percentage Change

Gold (spot)

$1,233.35

0.20

0.02%

Brent Crude (April)

$35.11

0.86

2.51%

Aluminium (London)

1558.5

-12.50

-0.80%

Copper (London)

4609

-58.50

-1.25%

Nickel (London)

8340

-335.00

-3.86%

Zinc (London)

1732

-49.00

-2.75%

Iron Ore (62%Fe Qingdao)

$49.75

-1.89

-3.66%

IG Iron Ore (CNH)

¥350.95

-10.40

-2.88%

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
IG, Level 15, 55 Collins Street, Melbourne VIC 3000
D: +61398601748 | T: +61398601711
www.ig.com

IG Markets

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