Clear break in the ASX

The breakdown in the ASX yesterday was a clear technical break – something I had been waiting for a month.

Oz
Source: Bloomberg

I had argued over the past few weeks that, if the ASX was to break 6000 points, it needed three things to happen. They were:

  1. A rate cut – tick
  2. A growth Federal budget – not likely
  3. Stellar banking numbers – fail

The final point is a very telling stat considering the banks make up over a third of the ASX.

The largest two firms in this space have completely broken down on fundamentals, having seen lacklustre first-year numbers and a disappointing quarterly update. The slow moving ship that is fundamentals looks to have finally caught up with the market pricing in this space and it’s quickly revaluating its outlook. Capital at the banks is getting squeezed, as are margins, and more and more are reporting negative Jaws (revenue versus cost).

The other major pricing issue for the banks is that the ‘yield trade’ is now under immense pressure on the change market dynamics.

First the banks no longer have the scope to really expand dividends – WBC has broken from its previous guidance of increasing its dividend by two cents a half. Both ANZ and WBC are discounting their dividend reinvestment plans to help their capital positions. CBA looks unlikely to report a stronger dividend at its final numbers in August.

Second, and more importantly, bond yields are picking up at the back end of the yield curve. The biggest trade over the past 24 months has been shorting the currency with a stimulating central bank, while long the country’s (or zone’s) equity market and long debt of the same county or zone.

Last week, Europe showed that this is not a one-way trade and that it does have an exhaustion point. Some will ask why, what has changed? Why should it not continue as before as the ECB is still injecting €65 billion a month?

The issue here is that QE from the US was part of what drove the European three-way trade - the carry trade into Europe is gone and negative yields on assets like German bunds are driving US investors to repatriate funds after four years of returns that are now losing hand-over-fist. The bond rout looks to be on.

The increase in the ten-year yield will drive profit taking in the banks and the funds back to the bond market. The breakdown in the ASX is clear and I think we’re going to find a reasonable run over the coming month – volatility is coming.

Compounding the issue is the risk events that are coming over the next few weeks, including:

  • Grexit – the Greece situation is coming to a head very quickly
  • US GDP – the trade balance yesterday actually suggests that Q1 GDP could be downgraded and the lofty Q2 GDP estimates are unachievable
  • Non-farm payrolls on Friday – the ADP read overnight was weak
  • European growth – looking rocky
  • China – positive risk on moves as macro leavers are pulled?
  • The UK elections – a hung parliament looks certain; Ed Miliband look like he is inching towards living in Number 10 

Ahead of Australian open

The carnage from yesterday looks unlikely to abate today and we’re currently calling the ASX down 42 points to 5650. Iron ore jumped above $60 a tonne for the first time since March but this is unlikely to stop the rout on the ASX.

The unemployment figures today are also going to be interesting as debate still rages about their reliability. However, there could be a growing disconnect between estimates from the RBA and the actuals.

If the unemployment rate remains in the low 6% range while expectations are for it to be heading to the mid-6% level. AUD remains a tough trade.

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Denne informasjonen er utarbeidet av IG, forretningsnavnet til IG Markets Limited. I tillegg til disclaimeren nedenfor, inneholder ikke denne siden oversikt over kurser, eller tilbud om, eller oppfordring til, en transaksjon i noe finansielt instrument. IG påtar seg intet ansvar for handlinger basert på disse kommentarene og for eventuelle konsekvenser som et resultat av dette. Ingen garanti gis for nøyaktigheten eller fullstendigheten av denne informasjonen. Personer som handler ut i fra denne informasjonen gjør det på egen risiko. Forskning gitt her tar ikke hensyn til spesifikke investeringsmål, finansiell situasjon og behov som angår den enkelte person som mottar dette. Det er ikke utarbeidet i samsvar med lovens krav for å fremme uavhengighet av investeringsanalyse og som sådan er ansett av å være markedsføringskommunikasjon. Selv om vi ikke er hindret i å handle i forkant av våre anbefalinger, ønsker vi ikke å dra nytte av dem før de blir levert til våre kunder.