ASX 200 rallies on rate cut expectations

The price action in equities remains choppy, with investors continuing to react to headline risk out of Europe, US economic data and corporate earnings. 

AUD
Source: Bloomberg

There were some fairly constructive comments out of Europe with the European Parliament President insisting leaders want to keep Greece in the eurozone. It seems investors are looking at Greece from a glass half-full perspective for a change.

There was also some encouraging data out of Europe which some construed as showing that the region is seeing economic conditions bottom. Additionally, another central bank, this time the Danish, took some action and cut its deposit rate by 15 basis points. This theme of central banks taking action is set to remain the key theme this year and there is growing attention on the Reserve Bank of Australia which meets next week.

US data continues to steam ahead and with unemployment claims dropping to a 15-year low, it is not a surprise the Fed upgraded its language on jobs.

AUD/USD slumps to 2009 levels

AUD/USD continues to head south as the market aggressively reprices rate cut expectations. This week has been topsy-turvy in the swaps market and the drastic shift through the CPI data this week has left many astounded. The swaps market has now shot up to a 69% probability for a cut and this is also being reflected in the AUD’s price action. AUD/USD dropped to $0.7720 and is approaching July 2009 lows at $0.7700. The momentum is overwhelmingly to the downside and the RSI has dropped deep into oversold territory. Due to the fact the pair is already oversold, traders are likely to be looking to sell the pair into strength.

There are no major local releases between today and Tuesday that could significantly shift rate expectations. On the calendar today we have PPI and private sector credit due out. Monday brings commodity prices data but this is already quite well documented given resource companies have reported achieved prices and trade balance numbers have shown details of trade by commodity. China releases manufacturing PMI numbers on Sunday and we are bound to see markets react to this on Monday.

Solid January performance

Ahead of the open we are calling the ASX 200 up 0.7% at 5607. The last time we traded above 5600 was back in September last year and therefore this is quite a milestone. Additionally it would mean we’ve had a fairly solid start to the year with a 2.9% gain for January.

Needless to say, rate cut expectations have been a big driver of the gains we’ve seen this week and we tend to see a ‘buy the rumour sell the fact’ affair when it comes to these situations. As a result, even if we do get a rate cut on Tuesday, the RBA would have to give a strong indication of further cuts in order to keep the momentum going I feel. 

CBA hit a record high yesterday and was a big driver of yesterday’s market gains. The stock’s dividend will be coming up soon as well and this is a key factor. On the company news front we have quarterly reports for AGO, BCI, NCM, ORG and PDN. Some of these companies have gone through a tough time and this will help provide some clarity on how they are travelling.

  

IGA, may distribute information/research produced by its respective foreign marketing partners within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

This information/research prepared by IGA or IGA Group is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. 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. In addition to the disclaimer above, the information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Any views and opinions expressed may be changed without an update.

See important Research Disclaimer.