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However two themes seem constant – a strong Chinese influence, and heavy short covering. Whether this continues is yet to be seen, although we stand in the same camp as the consensus view; while there are risks, Chinese growth should be around the targeted 7.5% mark.
Gold has rallied from a recent low of $1180 and is honing in on the July 24 high of $1348, where a break of this level should continue to bring out shorts. There is a clear conflict between physical and speculative demand right now, but as things stand China’s buying spree has been the bigger influence right now and has driven leveraged funds to cover shorts. Although the last data release was back on August 6, we have seen (according to CFTC data) gold net longs at the highest level in three months. Short positions were cut by a huge 2.6 million ounces on the week, which in effect is the largest weekly fall in short positions (gross) in over ten years. A move through $1348 should see $1370 (the 61.8% retracement of the May to June sell-off) come into play, for a bigger move to the multi-month downtrend around $1400.
Iron ore is also in firm bull market and pulling nicely away from analysts’ Q1 2014 consensus of $113 per tonne (p/t), as restocking is clearly underway. Many doubt the continuation of iron ore’s price, and it should gravitate towards $113p/t as supply comes online into the latter stages of the year. Still, as things stand there is a strong trend in this commodity, as there is in copper as well. AUD/USD still looks vulnerable, although a continued bid in iron ore should see further AUD bears close shorts given iron ore makes up the lion’s share of Australia’s export basket.
Traders have generally been keen to buy USDs today, and AUD/USD seems to be faring worse than most, despite a stronger ASX 200 and higher Nikkei. USD/JPY is at the heart of the move, with the pair hitting a high of 97.44 as traders have been digesting the idea that the Abe government may look at cutting the corporate tax rate to offset any negative effects caused by the increase in sales tax in 2014.
It seems logical that traders have been a little surprised by the timing of the potential cut, and seems to back the idea that an increase in sales tax in April 2014 is looking promising; although we feel the real risk is it comes out in 1% increases over five years, as opposed to a two-tiered strategy. Still the fact that the forex market has seen a good shake-out of USD longs and a lower probability of the Abe government back-tracking on a key policy initiative seem to be pushing up USD/JPY and subsequently the Nikkei.
The ASX 200 is up 0.6%, although the fireworks kick in tomorrow with CBA due to report. The stock makes up nearly 10% of the market, although if you put the other three banks into the mix you effectively have 30% of the whole market in play tomorrow, depending on any one thematic that could be re-iterated in the other three banks’ price action from CBA’s result. It’s worth highlighting the correlation this name has with the ASX 200, which at a 77% correlation (on a last traded price) is the highest since it got to 90% in February 2012.
The key issue one suspects will be around its dividend; while consensus is looking for the bank to pay a $2 final dividend, we feel the risk is it lifts it above this level to take it to a payout ratio of 80%. There’s even been talk of a special dividend being paid, similar to what we saw from WBC back in May. Still, we feel that any kind of higher-than-forecast dividend should see increased expectations for other banks to reward shareholders, thus this result could drive the entire index. Of course margins are key, while costs and asset quality will also be in play.
It’s worth highlighting the momentum in the market right now. Momentum indicators are headed higher, which suggests pullbacks should be bought, while from a more psychological point of view we are seeing sector rotation, which is thematic of a cyclical bull market. Earnings season seems to be going quite well as well, with 19% of all ASX 200 companies having reported, and 54.4% have beaten on the EPS line, while 42% have beaten on the revenue line. We’ve seen a clean break of 5116.8 (August 2 high) on the index, so 5200 and 5249 should come back into play sooner, rather than later.
European markets look destined for a fairly uneventful start and traders are questioning where the inspiration is going to come from to see them push materially higher from here. Perhaps a renewed push in improving data would be the key catalyst, although one wonders how much more improvement in growth we will see if European banks are looking to shed €3.2 trillion in assets over the next five years, and the negative impact it could have on credit. In upcoming trade we do have a number of interesting data releases in the form of the German ZEW confidence surveys and industrial production for the eurozone. German, Spanish and UK CPI (expected to drop modestly to 2.8% year-on-year) are also out. Atlanta Fed president Dennis Lockhart speaks in Atlanta in US trade on monetary policy and we’ve already heard him advocate a tapering exercise in September, so further hawkish narrative, mixed with above consensus (0.3%) retail sales print could see bond yields pushing towards the 2.70% level.