Aussie SPI futures have traded heavy through European equity trade, where we saw the various European equity bourses close slightly lower, where volumes were around 25% lower than the 30-day average. We can see SPI futures trading to a low of 6004, before finding support and then largely doing very little from the period of 10:00pm AEDT, with a tight range in play. I would suggest a focus on the Aussie SPI futures, especially for those trading our ASX 200 market, as we have seen solid support coming in at 6000 since mid-December. So, for those expecting to see the ASX 200 pullback say into 6000, then SPI futures could lead if we see a break of the figure.
Our opening call for the ASX 200, given Aussie SPI futures are 11-points lower, sits at 6066, although where the index heads after the full unwind of the market and from 10:20am AEDT is anyone’s guess. That said, if we look at price action on Friday and Monday, we can see that early rallies were quickly sold and this provides some believe that traders will use strength into 6070/80 to raise cash levels in the portfolio. With US markets closed, BHP and CBAs ADR did not trade, so we have no clear guide there and moves in commodity markets have been mixed, with spot iron ore closing 1.9% lower (at $76.59), while copper (+1.3%), US crude (+0.8%) and gold (+0.2%) have pushed higher.
There will be some focus on RIO, who release its Q4 17 production numbers at 8:30am AEDT, with the market going into this release clearly very excited about the level of iron ore shipments and also mined copper production. Where expectations for iron ore shipments from Pilbara are expected around 89 million tons in Q4, which puts into it on target for the 2017 run-rate guidance of 'around 330mt.' Whether the numbers suggest we see any major tweaks to the 2017 NPAT consensus estimates of $8.491 billion, or $4.80 EPS, is yet to be seen, as so often the analysts are close enough the company to not be overly surprised by production reports. What is interesting though, is that valuation is really starting to matter again in Australia and it's impacting a touch on sentiment, where CBA was recently downgraded to ‘hold’ by Bell Potter, on grounds it was 'priced to perfection', and where UBS yesterday downgraded ORG to ‘neutral’ and STO to ‘sell’ recommendation after the recent stellar run.
We have seen Morningstar and Investec cut BHP to a ‘sell’ and ‘hold’ call respectively. Although, I haven’t seen the rationale for being so bearish, with a $20 price target, one suspects the Morningstar analyst is seeing something most in the market aren’t. So let’s see if RIO can inspire today and with a forward (blended) price-to-earnings ratio of 15.2x, the highest since December 2015, one feels that there is an elevate possibility the analyst community start to trim back on their bullish stance ahead of earnings on 7 February. The trend in price though is that strong and weakness would seem to be a buying opportunity, in my opinion, and momentum is strong with RIO gaining 7.9% YTD, vs a 6.8% gain for the ASX 300 metals and mining index, and a 0.2% gain for the ASX 300.
There are other clear focal points for the session ahead. One of those is clearly the AUD, with the trade-weighted AUD sitting up at the strongest levels since October and AUD/USD hitting a session high of $0.7979 and pushing up 0.7% on the day. The event risk from the domestic data flow today is light, with new motor vehicle sales and ANZ consumer confidence unlikely to move the AUD to any great degree. The event risk today comes in the form of CNY moves though, as the inverse correlation between USD/CNY and AUD/USD is strong. Therefore, the PBoC daily CNY ‘fixing’ mechanism will get greater focus today, especially with USD/CNY at the lowest levels since December 2015. Traders, seemingly happy to bid up AUD/USD here on the notion that Chinese imports are gaining purchasing power when the goods they are buying are priced in USDs, while a stronger Chinese currency attracts capital inflows, which in turn should support economic growth, but also incentivises investors to move holdings out of USDs. In the past 24 hours we have heard from at least two central banks, who have disclosed they have increased their share of CNY in their reserves.
We are also watching EUR/USD, with the pair trading just shy of $1.2300, although with US fixed income and rates markets closed a key catalyst has been missing. There has been some focus here on comments from ECB member Hansson, who detailed that the ECB “should adjust policy before the summer” and the recent EUR appreciation “is not a threat to the inflation outlook”. So some bullish comments here, but this shouldn’t come as a surprise as most in the market understand he is one of the most hawkish members of the ECB. GBP/USD is also on the radar with December CPI (+3%) and core CPI (+2.6% expected) due at 8:30pm AEDT, with price testing $1.3800, with focus on $1.3804 – the 61.8% retracement of the 21% decline post Brexit vote. A move through here suggests a tilt at $1.4000.