Peak for the ASX is approaching

As we head into the last four trading days of October there are a few statistics that are starting to make me see a crest at the top of the hill for the ASX.

On Friday the ASX managed to buck the strange Asia trade (Nikkei plummeted 2.4%) to get within touching distance of 5400 points, the drivers came from the US and the expectations the Fed will do nothing to alter its current path on Thursday morning, plus further  solid third quarter numbers.

It was also helped by the China flash manufacturing numbers which showed that China is still chugging along despite some concentrating on the tripling of bad debt write-offs from five of China’s largest banks (I see this as a good thing as it reduces balance sheet risk in the long term).

The other interesting news out of China was the formation of a more transparent SHIBOR rate as nine of the largest banks join together to make the money markets more open with better regulation.

This is just another step China is taking towards market liberalisation; a very interesting move considering the question raised about the USD and its status as the world’s reserve currency. Is China moving in that direction? Is it getting closer to a floating CNY? They were the main questions out of the street over the weekend and a positive for the currencies in the region.

All this news saw the ASX locking in its 15th positive week out of the last 18 weeks, for a weekly rise of 1.2% to go along with a 1.7% rise the week before. Momentum is very strong at the moment; in the last nine trading days the ASX is up 4.3%, with the biggest fall coming on the 14th -0.44% compared to the largest rise of 0.98% the day after a complete reverse of the negative trade. I see the momentum continuing this week however the price action leads me to believe the market is starting to be priced to perfection and the momentum may turn post bank earnings reports.

ANZ will kick off bank reporting week we see NAB on Thursday then WBC in seven days time. I have been looking for the catalyst which could send these names higher still, but it’s hard to find. Don’t get me wrong, the names have been a fantastic investment story over the last 18 months, I just feel any result will be a sell-the-fact result 24 hours after the announcements. Watch the investment banks downgrade forecasts and target prices while pointing to price to earnings are being well above the historical averages for a reason to sell.

For ANZ I see the market targeting net interest margins (NIM) as the reason for concern; we have already seen one targeting the Asian strategy as another reason for a downgrade despite the fact bad and doubtful debts should reduce and revenue is expected to be strong. They will pick holes in the results and look for reasons to sell out.

As ANZ, NAB and WBC are just shy of 20% of the ASX 200, they will drag if their results are just in line. It is why I see a crest on the ASX in the interim and believe post the Melbourne Cup rates decision a small pull back is probably on the cards as institutional investors weigh up total return versus defensive income return. The attraction for a switch out of defence into cyclical players is glaring.

Ahead of the Australian open

What might also stall the rise is tomorrows address by RBA Governor Glenn Stevens at the 5th annual Australian and New Zealand Investment Conference. This should have more content around the AUD, interest rates and his views of the underlying economy than the speech he gave at the British Chamber of Commerce two weeks ago.

This speech is the last time the market will get to hear from the Governor before the November meeting and will give currency watchers cues to the direction of the AUD – a positive AUD is a negative for the market.

Having seen comments from Deputy Governor Philip Lowe on Thursday about the AUD being expected to reach higher levels than its historical average and that housing and investment are green shooting if Stevens reiterates this stand, it will be all the market needs to push the AUD higher still.

However, trade today should see risk firmly switched on, the banks should continue to rally into their results and the mining space should shift higher on optimism over the official Chinese PMI data on Friday.

We are therefore calling the ASX 200 up 39 points to 5425 (+0.72%); that will be a year-to-date high and is one point from my call that the market is heading to the 61.8% retracement level of 2007 high to the 2009 low of 5426. This will be a very interesting battle line - watch it closely.  

BHP’s ADR is suggesting the stock should add ten cents to $37.51 (+0.28%) which should support trade. With no macro data being release today, the market should be left to its own devices.

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This information has been prepared by IG, a trading name of IG Markets Limited and IG Markets South Africa 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. International accounts are offered by IG Markets Limited in the UK (FCA Number 195355), a juristic representative of IG Markets South Africa Limited (FSP No 41393). South African residents are required to obtain the necessary tax clearance certificates in line with their foreign investment allowance and may not use credit or debit cards to fund their international account.

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