This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. 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. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
European equities managed to rally yesterday, led by Greek equities, as investors focused on the idea negotiations among European leaders have been constructive. Markets also cheered a ceasefire deal that was announced in Ukraine and optimism around these two issues helped drive European markets higher.
Picking up on the positive sentiment, EUR/USD broke above a downtrend resistance line that’s been in place since December. This has seen it nudged through $1.1400 but the volatility is far from over, particularly given the finance ministers’ meeting reconvenes on Monday.
Until we get a concrete solution, trades on the single currency will remain headline-risk prone. Additionally, it seems markets are starting to price in a positive/perfect outcome from the Greece negotiations. As a result, anything mildly disappointing from these negotiations will be enough to trigger a pullback.
While everything is looking very positive now, this could all change very swiftly come Monday when leaders reconvene.
RBA maintains easing bias
The ASX 200 has been a standout performer in Asia and has managed to log fresh cycle highs. The stars seem to have aligned for Australian equities, with the RBA maintaining an easing bias, the AUD weaker and earnings being fairly encouraging.
The heavyweights have delivered on earnings this week from various sectors as well and this has worked a treat for sentiment. CBA, Telstra and Rio Tinto have been the highlights this week and so far we are off to a good start.
While some of the earnings didn’t quite shoot the lights out, the mere fact they are managing to continue growing earnings is comfort enough in a subdued economy. The most significant event of the day was RBA Governor Glenn Stevens’ testimony, which contained a very detailed view of how the central bank sees the economy.
The central bank has a clear easing bias at the moment and, while the swaps market and AUD didn’t react wildly to today’s comments, it’s almost as if the market feels a March cut is a foregone conclusion. With the swaps market pricing in around a 67% chance of a rate cut, the AUD seems to have already priced this in.
Perhaps surprising was the fact Stevens didn’t aggressively talk down the AUD. The governor acknowledged the fact the AUD has already declined significantly but he feels it should fall further, particularly on a trade-weighted basis.
The fact the RBA is also looking at ways of mitigating the impact of easing on property prices also suggests they are considering further easing. I expect to continue seeing the AUD being sold into strength as the RBA maintains its easing bias.
Record high for DAX
Ahead of the European open we are calling the major bourses firmer. The DAX hit a record high yesterday and looks like it is headed for a fresh record at the open today. The 11,000 level is now firmly in focus and I wouldn’t be surprised if we see this printed as early as today.
Perhaps the biggest move in the FX space was a reversal in the sterling on the back of the BoE’s inflation report. The BoE raised its expectation of growth next year and medium-term inflation. Additionally, Governor Carney said the next move in rates is more likely to be up and not down. Cable rallied to $1.5415 on the back of the report and comments.
It seems the BoE is certainly on a different path to the rest of the world bar the US. It’ll be interesting to see if the central bank will be forced to change its tune as global growth continues to wane and disinflation remains a real threat.
On the European calendar today we have German, Italian and French GDP, along with the flash reading for the region. We also have Europe’s trade balance and French non-farm payrolls.