US makes record highs as iron ore plummets

Currently, when materials are up, financials reverse and vice versa; for Australia today, it appears that the  banks will be up, and materials down.

The reason for the positive moves in the financials and other service-based companies is the optimism coming from the Fed and the BoJ. As expected, the Fed kept itself on auto-pilot with the unwinding of the asset purchase plan taking a further US$10 billion out of the program, leaving the purchase rate at $45 billion a month. The FOMC statement highlighted the fact that ‘growth has recently picked up’; this was despite the fact that first-quarter GDP grew at just 0.1%, which is the lowest quarterly GDP print since December 2012. The winter freeze is certainly to blame here and the leading indicators post-March clearly match the Fed’s thinking; however the silver lining here is that the Fed funds rates will remain untouched.

This had a very positive effect on US trade – the DOW made another record high on the comments around the Fed funds rate. The accommodative stance is certainly going to maintain the current upswings in consumer sentiment and  spending, which remained robust as seen in the GDP release with the spending component moving at a 3% growth pace. The accommodative monetary stance is also positively impacting payrolls and is creating a buzz heading into tomorrow night’s non-farm payrolls print, which looks to be heading for a plus 200,000 result – this would be a catalyst for further movements in US equities and the USD.

What is tempering the optimising in Australia today is the sharp breakdown in the iron ore price. The run on that was seen at the start of the week is now accelerating and the raw material has fallen further, losing 2.7% to US$105.40 as rebar and hot coils remain poor. The loss-making steel mills are feeling the pinch and the crackdown on collateral finance is creating a vice to the iron ore price. What is also likely to impact materials today is the release of China’s manufacturing PMI.

Expectations are for a slight expansion of 50.5 after a read of 50.3 last month.  However, industrial production has been slowing and there has been an increase in the bad and doubtful debts at the four largest banks. Are these coming from the manufacturing heart of the Chinese economy? If so, this print could see a 4 handle come 11:00am AEST.  

Ahead of the Australian Open

We are currently calling the ASX 200 higher by nine points to 5498 on the 10:00am bell (AEST). The movements today are going to be governed by the movements in the materials plays, particularly pure iron ore producers. BHP’s ADR is pointing higher, however it did reverse in London, and the momentum from yesterday is likely to filter out today on the China PMI.

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