Asia focuses on the BoJ and BHP results

Asian markets are mixed, with the region forced to work off its own leads with US markets shut for the Presidents Day holiday.

The RBA minutes from the February meeting have been the highlight of trade so far as they resulted in some volatility for the AUD. While there was nothing new in the minutes, AUD/USD actually managed to rally to 0.908 which saw it match mid-January highs before pulling back. Perhaps the fact that the RBA said conditions in the labour market tend to lag economic growth removed some of the downside risk from last week’s unemployment rise.

Reasonable growth prospects for Australia’s major trading partners should also translate to a positive situation for Australia. I suspect the reason for the move was a result of positioning heading into the minutes. We actually saw the AUD retreat early in Asia perhaps on some caution that there will be a couple of surprises, given the RBA has switched to a neutral bias. However this did not materialise and opened the gates for the AUD to drift higher. Potentially the market wants to hear a bit more clarity on the timeframe involved for this ‘period of stability in interest rates’.

A monster result from BHP Billiton, along with good outlook commentary, also added to the upside rise. On balance, it certainly seems the RBA has a more positive view of the economy over the course of the year. The RBA doesn’t sound as concerned as it was in previous meetings. Many will be thinking ‘where to next’ should AUD/USD clear this 0.908 barrier. This level is also the 38.2% retracement of the sell-off from October 2013, when AUD/USD was trading above 0.97, to the end of January 2014 low, when it traded below 0.87.

Traders will be looking for it to retrace to 0.921 in the near term which is the 50% retracement of that move. Should we fail to clear the 0.908 level then a pullback to 0.893 could be on the cards.

Nikkei jumps on BoJ

Elsewhere in the region, the Nikkei was trading higher heading into the BoJ meeting results. The index has since extended those gains to around 1.7% while USD/JPY spiked to 102.37. No changes were expected from the BoJ meeting but some speculated some form of action will be taken due to the disappointing GDP and industrial production figures along with pre-empting the impact of the sales tax hike which kicks in in April. The BoJ will double the size of its growth-supporting fund facility and also lengthen two special lending programs by one year. This has resulted in some big moves in the Nikkei and yen crosses.

Markets in China are also struggling despite a 16.1% spike in foreign direct investment. Perhaps the recent reforms are encouraging foreign investors to get involved in the China story. 

Europe in for a mixed open

Looking ahead to European trade, we are eyeing a relatively flat to mixed open for the major bourses. Investors will continue to be encouraged by a fall in peripheral bond yields, particularly 10-year Italian yields which reached an 8-year low.

While the ECB still seems open to a rate cut, as highlighted by Nowotny’s comments; I think the commentary investors would prefer to hear is around what unconventional measures they could potentially look at. The German ZEW economic sentiment will be the highlight in today’s trade. GBP/USD traded at a high of 1.682; encouraged by a jump in house prices yesterday. The pair has since declined on the back of some comments by the BoE’s Miles.

Miles said a rate hike is the last line of defence if the housing market overheats. This suggested a rate hike is still quite far away and resulted in some profit-taking in sterling. GBP/USD is just holding on to 1.67 heading into CPI data at 20.30 AEDT. Inflation is expected to remain steady at 2%, but some analysts are concerned we might see a slight easing in headline inflation. The US reopens for trade today with limited releases on the calendar apart from the Empire State manufacturing index.

BHP results impress

The ASX 200 was pinned on BHP Billiton’s monster result today which saw the miner’s stock surge in Asian trade and rally towards February 2013 highs. Iron ore EBIT reached $6.5 billion in the December half; a 35% increase on last year due to record production numbers, with 108 million tonnes all up and an average price of US$112 a tonne.

The stellar iron ore numbers come on the back of a ramp up in the Jimblebar mine and an average AUD of $0.89 from $1.04 this time last year. What is also positively impacting the beat on the consensus numbers is the streamlining of projects, as BHP see a 65% increase in operational income coupled with a 25% reduction in outflow leading to a $7.8 billion increase. With capex expected to fall to $18 billion by FY14 end, and $12 billion by the end of FY15, this figure should improve further. BHP has also seen its first beat on consensus on the NPAT line since the first half of 2011 as productively gains have seen $4.9 billion in savings; with major projects now in production phase that is expected to continue into the second half of FY14 enhancing the full-year outlook.

What was a little disappointing was the petroleum division, which saw a fall in earnings over the half, however this was due to increased depreciation and amortisation which is expected to be countered by its US shale projects. Although no nominal guidance was given, the outlook for the coming six months looks like holding on its current course; having seen record trade balance data from China and its tier-1 assets increase productivity.


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