Inflection point for market views

Bond markets continue to illustrate the market’s top-down expectations for the year ahead. Accommodative central bank policy is here to stay – and is likely to be even more accommodative by year end in most cases.

Source: Bloomberg

Geopolitics is just a flashpoint away - Russia being the case-in-point, with last night’s credit downgrade to junk status. Greece also voted in an anti-austerity government, as expected.

Finally, inflation – whether it’s oil, wages or stagnating consumer consumption, inflation remains a ‘cut’ risk to monetary policy and a general risk to economies everywhere.

These views remain my baseline point strategy formulation. I see positive cyclical risk in the second half of the year as the top-down effects start to feed through to corporate earnings and consumer sentiment.

However, current cyclical risk remains too high to be championing a return to those that have seen share prices halved. There are trading opportunities here but formulating anything more than a nine-month view is hazardous.

A key example of cyclical risk form a bottom-up view is energy. Production results from the likes of Woodside and Santos (STO) were mixed. WPL saw average prices falling over 25%. STO saw record numbers. However, it has certainly opened the door for impairment charges come the mid-February earnings release. WPL is now facing major headwinds from the market on whether it has the ability to provide the forecasted dividend in the face of declining prices. STO will be questioned on its general position, considering debt was at 31% at the time of the previous update.

I think we’re likely to see sharp intraday and even two-to-three day positive rallies, particularly leading into earnings. However, I see these as very short-lived. I would be trailing stops to avoid profit erosion as the likely flip trade will tap out those not nimble enough to deal with the swings.

The question is whether you can formulation your strategy from a bottom-up fundamental view. Although macro data will fade slightly this week, it is still more likely to move markets than any micro details.

Australia sees its inflation read on Wednesday, followed by the first RBA meeting of 2015 in seven days. Although I see a slim chance of a rate cut on the back of the employment read and the currency having smashed through 80 cents, the market is still pricing in a 35% chance rates will fall.

This will put yield differentials front and centre and will reinforce the quasi-bond trade for Australian investors. The banks, Telstra and the supermarkets all remain well bid heading into the RBA meeting and the Australian earning session.

Ahead of the Australian open

ASX is pointing higher on the open. We are calling the market up 14 points to 5516. However, buckle in for some wild trading in iron ore miners as new five-and-a-half-year lows in the price hit the headlines. Iron ore into Qingdao fell to US$63.54 a tonne, and BHP’s ADR is pointing lower to $29.05.

The likes of Macquarie, CSL and ResMed will see strength while the big four see flows almost as big as funds as invests look to equites that will ride out the upcoming volatility.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material 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 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. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

Find articles by analysts

Een artikel zoeken

Form has failed to submit. Please contact IG directly.

  • Ik wens per e-mail informatie van IG Group bedrijven te ontvangen over handelsideeën en IG's producten en diensten.

Voor meer informatie over hoe wij uw gegevens mogelijk kunnen gebruiken, bekijkt u ons Privacy- en toegangsbeleid en onze privacy website.

CFD’s zijn complexe instrumenten en brengen vanwege het hefboomeffect een hoog risico mee van snel oplopende verliezen. 79% van de retailbeleggers lijdt verlies op de handel in CFD’s met deze aanbieder.
Het is belangrijk dat u goed begrijpt hoe CFD's werken en dat u nagaat of u zich het hoge risico op verlies kunt permitteren.
CFD’s zijn complexe instrumenten en brengen vanwege het hefboomeffect een hoog risico mee van snel oplopende verliezen.