All eyes to the east

The prevailing theme from overnight trade in Europe and the US was that all eyes are turning to the east.

The cyclical world is switching on as stabilisation in the world’s second largest economy gains momentum – turn the risk trade on. The numbers out of China over the past week coupled with its August figures are producing positive signs that the Chinese will achieve its official GDP target 7.5% year-on-year.

The effect of the industrial production numbers was another night of green on the screens as the globe experienced its seventh consecutive positive week. As we alluded to yesterday; not only is China’s industrial production picking up, it is coupled with strong export figures that were ahead of expectations.

Most of these exports head to the US and Europe which are the largest consumers of Chinese goods, and increased consumption of consumer products is coming despite the fact the US is staring down the barrel of tapering and ten-year bond yields looking to break through 3%.

However we would never suggest fighting the momentum trade, and the markets are looking more and more comfortable with the prospect of a ‘mini-taper’. Emerging market currencies have not only stabilised but rallied as the central banks of India, Indonesia, Turkey and Brazil finally manage to catch the falling knife through the use of their own foreign cash reverses to support their respective currency, and the rush to the exit trade in these markets is finally running out of liquidity.

It also looks like the carry trade is working perfectly for risk markets. The yen is the one to watch here; USD/JPY broke the party barrier to hit ¥100.3 as the stimulus from the Tokyo Olympics and the continued stimulus plans from the BoJ and the Abe government sees Japanese growth figures growing solidly (may not be as fast as analysts had expected but still at a reasonable rate). The carry trade is very good news for the local market.

Investors look very happy to use the carry trade to hold risk assets, funding is cheap and the currency differentials are still credible. You only have to look at big end cyclical plays to see that local and international investors alike are latching on to local equities with cyclical characteristics.

Woodside (WPL) is a prime example, at $39.05, touching two year highs; WPL’s production pipeline looks solid and with the Browse project looking like it’s heading for a floating LNG, set up capex should remain lower than originally forecast. It is a perfect Asian facing story with most of its gas exports heading the region. We are watching the $40.30 level, which is a very strong inflection point; if the upside momentum trade can punch through this mark investors will flock to the trade in droves.

Another example of a cyclical stock with its eyes on Asia is Santos (STO). It too is riding upward momentum and at $14.91 it too is at two year highs. The fundamentals  of STO look very strong, with the GLNG product on time and (so far) on budget. The Cooper basin exportation plans are growing and production from the region is steady, while its Western Australian assets are also ramping up. The share price is riding the LNG wave of optimism and if it can hold at $14.83 a second leg higher would see STO moving to $16 by the year’s end if current sentiment is maintained. With carry trade support coming through, this is a very strong possibility.  

Ahead of the open we are calling the ASX 200 up 29 points to 5230 (0.56%). This call is just 19 points off the year-to-date high, and with Chinese Premier Li Keqiang addressing the world economic forum this afternoon, any positive talk about China’s future growth and industrial pipeline will see this level reached very quickly.

BHP’s ADR is suggesting the stock will add an additional 19 cents on the open to $36.09; as the ASX listing has a chance to react to the industrial production data from yesterday, and it too sees the cyclical risk trade adding value support to its share price. 

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