Back to back weekly gains for the ASX 200?

It’s shaping up for a positive open on the Aussie share market and there are some really interesting developments taking place.

Source: Bloomberg

Looking at the bigger picture, traders still need to take into consideration that the investment landscape could change significantly next week and while moves in the USD hold the key for all risk assets, this will largely be driven by the implied probability of a December rate hike from the Federal Reserve. The market is currently pricing a 78% chance of a hike and it has to be seen as a positive that finally after so much deliberation we will finally see the Fed guide the funds rate higher!

 On the docket:

  • International Monetary Fund (IMF) board meeting on yuan inclusion (30 November)
  • Reserve Bank of Australia (RBA) meeting (1 December) and Aussie Q3 GDP (2 December)
  • European Central Bank meeting (3 December) – sell the rumour, buy the fact?
  • OPEC (4 December)
  • US payrolls (5 December at 00:30 AEDT) – consensus is for 198,000 jobs

Today’s ASX 200open is eyeing a move into 5240 (+0.6%), so all eyes will be on whether the market can break yesterday’s cash session high of 5253. It will also be interesting to see if the market can close above 5256 (last Friday’s close), effectively printing the first back-to-back weekly gains since 9 October.

BHP will naturally get attention, although the ADR didn’t trade last night with US markets shut for Thanksgiving. It’s worth noting that CME copper is actually 1.1% lower from the 16:00 AEDT close. Oil and iron ore prices are also modestly lower from the official close of the Australian equity market, so much of the positive flow we saw yesterday in metals and bulks has been priced in. However, it seems equity is still likely to be bid today.

The big play of late has been long DAX. Personally, I have liked to express this view by being short the S&P 500 against the DAX as a pair’s trade. While the DAX itself has entered into a bull market, and breaking a number of key trends in the process, the DAX/S&P ratio has pushed up 10.7% since October showing robust outperformance of the German market. This seems to have been driven by a weaker EUR/USD, and the correlation between a weaker EUR/USDD and higher DAX/S&P ratio is strong.

A similar issue is playing out in the ASX 200, whereby being long DAX/short ASX has worked very nicely. The ratio (the best way to analyse markets as part of a long/short strategy) has increased to 3.1884 (currency hedged) and is testing the highest levels since early 2001. The ratio has increased 100% since 2011 and shows massive outperformance from the German market. It seems excess liquidity, balance sheet expansion, strong earnings and credit growth are rather compelling.

Honing into today’s potential market moves, I certainly think the financial sector is key for the broader market. This is not just because of its sizeable weighting, but because the financial sector is testing the October highs of 6200 – a break here would naturally be hugely positive. To highlight a couple of levels, CBA is finding good supply into A$80.70 and ANZ $28.00, so watch for a potential move through here today. In healthcare, CSL could trade with a 100 handle today and the bulls are in full control of this stock. After having every chance to roll over yesterday, the buyers piled in with the stock closing just off the highs. The daily chart is a thing of beauty.

Slater and Gordon will be one of the more active stocks again after 85 million shares traded hands yesterday. These sorts of events take time for the market to find a ‘fair value’ and we are in a period where disagreement among traders and investors in heightened. This should mean volatility.

It’s worth pointing out that the consensus numbers have been released for next week Australia Q3 GDP print. The market is looking for 60 basis points (or 0.6%) of growth on the quarter (2.2% year-on-year), with the economists call ranging from +0.1% to +0.7%. Yesterday’s CAPEX print should shave about 20 basis points from growth, but we still need to factor in company operating profits, inventory and the current account (released in the lead up to Q3 GDP), where net exports are expected to contribute 0.95 ppt to the Q3 print. It feels as though 0.6% growth on the quarter seems fair, but there could be modest downside risks.

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.