Equities bounce on reduced geopolitical concerns

Asia is off to a positive start to the week, with investors cheering a ‘downgrade’ to geopolitical risk. 

Source: Bloomberg

Developments from Friday suggested Russia is de-escalating the conflict with Ukraine. Additionally some saw the fact that the US will not deploy ground troops in Iraq as a positive. There has been another ceasefire between Israel and Hamas and it’ll be interesting to see if this one will hold. While the uncertainty on that front is likely to remain rampant, investors are certainly happy to bid risk higher today.

With risk gaining ground, some safe-haven assets have unwound with the yen being one of them. After dipping to as low as 101.51 on Friday, the pair has since bounced back above 102.00. This move has underpinned Japan’s equities today with the Nikkei outperforming the region and trading back above the 15,000 level. The gains are not quite as pronounced in the rest of the region, but still enough to appease after last week’s woeful performance. Interestingly, while the yen has unwound, other safe-haven assets such as gold haven’t seen much movement at all. Perhaps this highlights the degree of cautiousness investors are still exercising at the moment. Price action in treasuries and bunds later today will also be key in monitoring risk sentiment after yields dropped quite heavily last week.   

ASX 200 key equity moves

While equities are flying in Japan, the ASX 200 has only managed to put on around half a per cent,   with the banks mainly responsible for the gains. Despite the gains, I feel equities are at risk of being sold into strength in the near term as confidence remains subdued. BEN’s results have helped set the pace for the banks with results driven by good net interest margin growth. While BEN didn’t necessarily shoot the lights out, the banks were just looking a little oversold over the past week and this played into its hands. The results showed good growth in cash earnings, while net profit was a touch below estimates. The dividend of 33 cents was bang in-line with estimates and the net interest margin was up modestly at 2.24%.

CBA is also starting to ramp up heading into its results and the $80 mark also managed to lend some support. JB Hi-Fi is one of the worst performers of the day on the back of its FY earnings. While earnings seem to be mostly in-line with recent guidance, sales momentum seems to have dropped off considerably and this will be a concern going forward. Not even the buyback has helped to stem the tide. Perhaps the drop off in sales momentum leaves investors uncertain about the guidance. JBH had gained significant momentum in past weeks and traded to $20. Traders were hoping for a well-received result but this hasn’t been the case and resulted in profit taking and a pullback.

Treasury Wine has extended gains after receiving a competing takeover offer from a global private equity investor. This takeover is also at $5.20 cash per share and investors will be hoping this sparks a bidding war for the company. TWE is now trading above $5.20 with the second bidder reported to be TPG Capital. Some analysts have suggested fair value for the company could be around the $5.50 mark.

Solid bounce expected for Europe

Looking ahead to European trade, we are calling the major bourses significantly higher as investors get a chance to react to the developments seen post-European trade. The DAX continues to look particularly interesting after having entered correction territory, but at the same time held onto the 9000 level. It seems we’ll see a strong bounce, particularly for the DAX today, but the question will be how far it can run before sellers come back into play.

Data is limited today but mid-week inflation reports should shed some light along with the German ZEW index. Another highlight for the week will be a speech by the Fed’s Stanley Fischer on moving ahead from the recession. The single currency has been sidelined at 1.3400 against the greenback and looks like it could continue to consolidate ahead of key European data.

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