The ASX renaissance

The ASX 200, like many other equity markets, has undergone a renaissance of fortune, reclaiming the 5000 level after trading down to 4706 on 10 February.

Source: Bloomberg

Despite a 6.3% rally, the index is neither overbought technically (the 14-day RSI is only at 54) or reached an extreme if we look at market internals. A simple look at the percentage of companies trading above their 20-day moving average shows this level to be 68%, which is certainly healthy and a nice move from 24% of 10 February – but again, not at extremes. It really shows good participation in the rally. We have also seen the percentage of stocks trading at a four-week low fall to 3%, while those at a four-week high have increase to 16%. This is still a low number and we shouldn’t think about contrarian positions (purely using internals as a guide) until we see 50% of stocks at a four-week high.

The short-term traders have had a field day in the resource names and we can see 11% of ASX 200 companies now 50% from a 52-week low. More short term, there are 11 stocks on the market which have rallied 40% or more from their 30-day low which shows just how aggressive the recent turnaround has been. Names like BSL, MIN, OZL, NST, FMG, BPT and AWE actively traded here.

The bulls will be gunning for a break of the 1 February high of 5074, which could suggest a more protracted move into the 5300 region, although this still seems like a big ask. Certainly, the market internals suggest we are not at extremes and this could feasibly happen. Our opening call sits at 5026 – another strong open helped by some solid US and European leads driven by further stellar gains in the materials and energy space.

BHP will get the headlines today and they will enjoy reporting 1H16 earnings on a day when its American Depository Receipt is up 2%. All eyes fall on capital management as they need to protect their single A-rating which requires moving in line with Rio Tinto and targeting a payout ratio of 40-60%. This means a dividend of 31 cents or less. They can look at CAPEX, but one suspects it will be down to the dividend. Investors of both BHP’s equity and debt want clarity and they ideally want to see rating agency S&P come out with a statement as soon as possible on the rating review. There is a real catalyst here for upside appreciation if we get clarity.

Iron fire

Iron ore has become a flash point for the changing risk story in the ASX:

  • It has added 34.5% since the December 2015 low, and is up 18.2% year-to-date.
  • The spot price since China’s return from Lunar New Year has seen Qingdao delivery adding 18% since February 15.
  • Iron ore is bucking forecasted supply/demand expectations –partly due to Vale and BHP being impacted by the Samarco disaster which skewed forecasted supply (it has taken approximately 22 million tonnes per annum of forecasted output off the table). However, stockpiling into China is clearly driving demand which is also positively impacting price to the current price of US$51.52 a tonne.
  • The impact on listed firms has been clear, BHP is up 30% from its low, Rio Tinto has added 9% since its results that saw 50% decline in statutory net profit, FMG is up over 20%, while some junior miners have added between 15% to 36%.
  • The second positive from the iron ore price is that it is now US$8 ahead of treasury expectations once C1 cost are included. This is an unexpected delight for the budget and an unexpected concern for the Reserve Bank of Australia (RBA).

The AUD perfect storm

The AUD is now well off the lows and has a perfect storm scenario facing it.

It was the best performing currency overnight and had some of its biggest moves again the EUR, GBP and JPY in over 18 months to seven years.

The Brexit can partly explain the 3% move against the GBP; however, the EUR and JPY moves are a bigger issue for the RBA.

The perfect storm trade

  • Carry trade – AAA sovereign rating, a budget in relatively good shape compared to global peers, and bond yields over 200 basis points ahead of global peers.
  • Commodity bounces – iron ore is clearly a public and private firm positive, however the oil price bounce is also a risk on positive seeing risk currencies returning to the fore.
  • RBA rates – the cash rate is likely to be rooted to 2% despite calls to see it lowered. The fact that the RBA itself wants the AUD at around US$0.65 suggests this rate could be lowered. However, the heat that the rate cut could put into the domestic market is a risk too far for the RBA in these current conditions.

This will mean that the AUD is likely to freely move to the upside. We see no reason for the AUD not to move back to the mid-73 cent handle, and even higher if the carry trade ramps up on the back of the European Central Bank moving the deposit rate further into the red. It’s an unwanted consequence of risk’s return.  

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