Iraq concern is dictating sentiment

It has predictably been a mixed start to the week, with a lack of drivers to dictate price action.

Japan stock exchange
Source: Bloomberg

As a result Asia has been left to its own devices and investors seem reluctant to bid equities higher. The one factor in play at the moment is an escalation of Iraq concerns and how this is pushing energy prices higher. With reports suggesting the US will be looking to reconcile the relationship with Iran in order to deal with the Iraq situation, investors are happy to remain cautious. This has kept energy plays well bid in most of Asia today.

Taking a closer look at currency plays, which tend to dictate sentiment, moves have also been limited in Asia. The most significant move has been USD/JPY slipping below 102, presumably on the back of a safe haven play on the yen. The drop in USD/JPY has also put Japan equities under pressure with the Nikkei dipping below the 15,000 level. The safe-haven trade certainly seems to be gaining momentum as gold has also managed to extend its gains in Asia.

Gold resumed trading in Asia at 1278 and has since extended this to 1282. It has been a swift comeback for the precious metal, which dipped to 1240 just a couple of weeks ago. This has also seen it trade right on a downtrend resistance line which has been in place since 15 April and we really need to see a close above 1282 to confirm the break. Additionally, this would also see it close above the 200-day moving average.

Weaker open for Europe

Looking ahead to the European session, we are calling the major bourses weaker. Perhaps the FTSE might be an outperformer today after having been thumped on Friday on the back of Mark Carney’s rate hike comments.

This week will be fairly busy on the UK economic calendar with the BoE MPC minutes, CPI and retail sales due out. Any further improvement in data along with a change in bias among BoE members will only fuel the rate hike argument further. As a result, we could see investors in the UK exercise some caution. On the European front, we have CPI due out later today but I doubt this will have much of an impact. In the US, we have the Empire State manufacturing index, industrial production and the NAB housing market index to look out for. The US dollar will be an interesting one to watch this week with the Fed meeting likely to drive sentiment in the back end of the week.

Materials snap losing streak

The Australian market has been choppy today, with a slight bias to the downside. Surprisingly, the materials space is actually doing well for a change, with even the iron ore names gaining ground despite another iron ore price fall. There is plenty of talk around iron ore being at a cyclical low, with most analysts expecting a rebound in Q3. Perhaps this, along with news Fortescue has ordered new ships to the tune of US$275 million, has helped iron ore names recover some ground today.

Gold names have been a standout, with Newcrest trading above $10 again and Medusa Mining rallying 7%. Gains for the precious metal on safe haven demand have really been the driving force behind the gold miners today. In the energy space, STO, OSH and WPL have all edged higher and I suspect this trend will continue in the near term as the Iraq situation persists. Worley Parsons has also been an outperformer, benefitting from a JP Morgan upgrade along with its exposure to the energy sector.

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