US markets provide backbone for Asia

US markets have provided some backbone for the Asian session today, with our opening call currently at 5530 (+0.3%).

NYSE
Source: Bloomberg

Since April moves on the ASX 200 to 5540-5550 have been met with a wall of supply and this has been the key sell zone, so it will be interesting to watch price action from here. Naturally the banks will be a key driver of the broader market, as they always are. So while some have speculated that the recent financial system inquiry could be a headwind, in so much that it could lead to higher capital charges, traders haven’t been particularly rewarded for shorting this space as yet.

Looking at the banks technically

Take CBA for example; moves below $81.00 have proved good buying opportunities of late and I would be looking more closely at the fact the 20-day moving average is moving perfectly sideways and I would be looking at buying and selling two standard deviations either side of this average (i.e. using Bollinger Bands) at $80.33 and $82.36 respectively.

There is also a pronounced downtrend drawn from the June high (on the daily chart) which the bulls would like to see break at $81.88. The same set-up is true on WBC and I would be playing a $33.52 to $34.62 range and with the 14-day RSI (on both stocks) around eh 50 levels this throws weight to my strategy of playing sideways markets.

NAB is looking somewhat more bullish and would be my pick in the space on a short-term basis, closing long positions on a close below $33.35 (the 20-day moving average).

Materials names should be supported today, although the energy space is more likely to see better gains on open, given the higher WTI price relative to the 16:00 ASX 200 cash close. The energy space on the S&P 500 was the star performer rallying 1.6%.

WPL will be in focus today with Q2 production numbers due, with traders looking at the run rate at Pluto and any guidance to future developments. Like the banks WPL is tracking sideways and traders should look at range trading strategies – I’d personally be looking at trading in the short-term in a $41.07 to $41.91, until we find a new catalyst and this seems to fit the view of Evan Lucas, who sees the stock as fairly valued.

Looking at moves in the commodity complex and both gold and iron ore are basically unchanged from 16:00; however CME copper has pulled back just over 1%. This may be a headwind, although it’s interesting to see BHP’s ADR is suggesting a strong open. BHP is also in an interesting space and moves above $38.00 have been level short sellers have been happy to work offers into since August 2013 and apart from February when the stock traded just shy of $40, shorting BHP above $40 has been a profitable trade.

The materials sector up 7.6% over the last month

Materials were an unloved sector going into 2014 and while the sector is only just in positive territory year-to-date, traders have been aggressively closing shorts and many feeling more compelled to go long over the last month. Naturally the rebound in copper and iron ore has helped; much of this testament to the under the radar stimulus conducted by Chinese officials, with around 40% of Chinese banks having reserve ratio requirement eased. It looks fairly assured that China will not face a hard landing and the 7.5% growth target should be met.

Still, the idea that China was supposed to be slowly deleveraging seems in doubt and if you look at a longer-term chart of total social financing and the supply of credit, it actually looks although we witnessing a third credit boom. The idea that consumption will slowly replace investment as the key growth input seems to be fading away, with industrial production increasing 40 basis points yesterday, following the improvements seen in electrical consumption and railway freight. This is all well and good short-term, but does nothing to ease longer-term concerns.

In terms of economic drivers, traders will keep an eye on NAB business confidence, while RBA member Edey speaks. In Japan we get the weekly Ministry of Finance fund flow data, which could have ramifications on the JPY and subsequently the Nikkei, however it’s positive to see the Japanese equity market diverge of late from USD/JPY. However, intra-day drivers in Asia seem fairly low key.

Looking ahead, we have a big night of earnings to position for with Google and IBM due to report after the close. IBM has a 7.6% weight on Dow futures given its high price and traders will be keen to see whether they can continue to guide the market to 2014 EPS of ‘at least’ $18. Google are expected to earn $6.26 in Q2 on revenue of $12.33 billion.

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication.