Where is the love for the ASX?

Another 0.3% drop in the US dollar index and positive data releases in Europe and the US have seen solid equity gains in the overnight session.

Source: Bloomberg

But concerns over the Aussie banks and their rising bad and doubtful debts (BDDs) has seen the ASX significantly underperform major bourses globally all week. BHP and RIO both had a stellar session on the FTSE gaining nearly 6%, respectively, and CBA’s American Depository Receipt (ADR) gained 0.7% in the US session making one cautiously optimistic for the open today. We are looking for the ASX to open up 0.9% higher, but the big question is whether it can hold it as it has consistently given away its early session highs throughout the session all week.

  • Aussie Dollar: Despite these positive developments in the US economy, Janet Yellen’s speech this week has continued to drive the US dollar lower overnight. They DXY dollar index dropped to its lowest level since October overnight. This helped drive the Aussie dollar up over US$0.77 briefly, its highest level since 1 July 2015, even though the iron ore price dropped 1.7%. As long as the Fed keeps talking down the USD, the Aussie is likely to continue at record highs. But inflation does look to be coming back in the US and the market knows it – Treasury Inflation Protected Securities (TIPS) have seen strong buying with the iShares TIPS bond ETF gaining 1.2% this week. This growing evidence of inflation may require the Fed to dial back their dovishness, and that will likely bring the lofty AUD back down to earth.
  • Germany’s EU harmonised CPI returned to positive territory in March gaining 0.1% year-on-year, after declining 0.2% in February. Although most have attributed this to transitory effects that should dissipate over the coming months. Nonetheless, the news helped provide further positive sentiment for European equities.
  • US ADP employment for March saw the second month in a row with over 200,000 new jobs added. This certainly bodes well for Friday’s all-important non-farm payrolls (NFP) number. The regional manufacturing indices are all pointing to a strong gain in the ISM Manufacturing PMI on Friday as well. This is likely to coincide with job gains in the long suffering US manufacturing sector, all pointing to a strong NFP release.
  • The oil price looks like it is ready for a pullback. Last night provided the twin tailwinds of a solid Department of Energy (DOE) weekly report and a weaker dollar, a combination that in recent times would have likely provoked an over 6% rally in the spot price. But oil gave back most of its intraday rally to close relatively unchanged. This sort of price reaction provides further evidence that the technical set up in oil is increasingly pointing to a pullback to US$35 in the oil price in the short term. The big concern is oil’s strong correlation to equity indices in recent times, and such a move could see a concomitant move downwards in global equities.
  • China’s Big Four state-owned banks all reported earnings overnight, but the main question for China analysts was how much their non-performing loan (NPL) ratios increased by. China’s Bank NPL ratios grew to 1.67% in 4Q from 1.59% in 3Q, a tiny 0.08% increase. Yet most bank analysts believe these numbers are systematically under-reported and put the NPL ratio in the 10-20% region. This tiny increase also brings the NPL ratio to the highest level since 2Q 2009. The main takeaway is that NPLs in China continue to tick up, and while less of a concern for the Big Four, at mid-tier banks this trend is certainly an issue.

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