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8@eight: ASX off to flat start; all eyes on Aussie

The Australian market looks set to open flat, unimpressed by moves on Wall Street where the Dow Jones Industrial Average lifted but the tech-heavy Nasdaq lost 0.6 per cent.

SPI futures were down two points, or 0.03 per cent, at 5718 while the Aussie dollar last traded down 0.5 per cent at US79.68 cents.

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Super Wednesday to drive the AUD

It’s a big day of event risk on Wednesday with RBA governor Philip Lowe and Q2 CPI holding the potential to drive real volatility. (This video was produced in commercial partnership between Fairfax Media and IG Markets).

On Thursday, the Australian dollar soared passed US80 cents for the first time in more than two years as diminished expectations for rate rises in the US dented the greenback.

In the US, a swoon in technology and transportation shares led the S&P; 500 slightly lower on a day full of corporate earnings reports, the Nasdaq fell, but the Dow industrials set a record closing high, helped by a jump in Verizon.

The Dow Jones Industrial Average rose 0.4 per cent, the S&P; 500 lost 0.1 per cent and the Nasdaq dropped 0.6 per cent.

Locally, in economic news on Friday, the Australian Bureau of Statistics is to release the June-quarter producer price index.

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The long and short of it

1. Wall Street: A somewhat disappointing night for the bulls, which leads us to a weaker open for the ASX 200 in the last trading day of the week. Tech has been sold off harder than the S&P; 500 as have transports stocks, while we can see Verizon Communications supporting the Dow, which has closed up 0.4 per cent on the day. Our lead though comes predominantly from the S&P; 500, which to be fair has traded in a punchy 22 point range, the biggest since the 6 July. On a positive note we have seen traders "buy the dip", but we didn't see the S&P; 500 post a firm close below Thursday's lowl.

2. Federal Reserve: The US second-quarter GDP figures will be the event risk in upcoming trade, putting the US dollar on close watch, specifically against the Japanese Yen and the Aussie. We need to think about how these data points shape and influence the Federal Reserve's thinking and would a number north of 3 per cent really increase the prospect of a hike in December in their eyes? I suspect it increases the probability of a hike by between two to five percentage points, bringing the market's pricing back to 50 per cent.

3. Aussie dollar: However, inflation reads released on August 1 and core CPI on August 10 I think will be the bigger influence on market pricing. Anyhow, with the Aussie now back below US80 cents, after touching a high of US80.65 cents, a strong US GDP print above 3 per cent would send the pair back to the US79 cent level, although the 21 July lows of US78.74 cents is the big level the bears are eyeing. Of course, a weak GDP number (of say 2.2 per cent and below) is a genuine risk and would send Aussie through the session highs.

4.Commodities: The focus from clients will no doubt fall squarely on trading the Aussie, although we have seen some good flows in US crude, which as mentioned in prior reports is looking at a test of the $US50 level, where I expect the sellers to be active. It's been a good week for oil and price reflects the improving fundamentals, and a close through $US49.42 (the 200-day moving average) would get some headlines.

5. Energy stocks: Aussie energy names, such as Santos and Oil Search, have warmed to the moves in oil but still are not attracting strong institutional investor flows and we can see price action is positive, but far from bullish.

6. Local market:  Perhaps energy can be a pocket of strength today though, with our ASX 200 call sitting at 5770, although when the S&P; 500 was trading at session lows our call for the ASX 200 sat down at 5748 and things were looking pretty ugly. Other leads to think about include a 0.3 per cent drop in spot iron ore to $70.20 a tonne, although iron ore futures have seen gains and the daily chart continues to look bullish. Goldman Sachs raising their estimates on iron ore in 2017 to $70 has seemingly got the press, which could be an interesting indicator in itself, although they retain their bearish 2018 view. Gold is largely unchanged, which is a reflection of no real moves in US fixed income markets, while copper has also done very little.

7. Focus on earnings: I see today though as a chance for equity investors and traders to really start to think about the Aussie earnings season, which unofficially kicks off on Tuesday. Can this be the catalyst to see the ASX 200 break the sideways range it's been in since mid-May? With consensus earnings per-share estimates (for the ASX 200) having been lowered by just over 2 per cent in the last two weeks and the ASX 200 trading on 15.8 times forward multiple the bar is not set too high, but a break into 5900 on earnings alone (we would need further strength in US markets) seems a step too far.

8 Market highlights:

  • SPI futures down 10 points or 0.2% to 5710
  • AUD -0.5% to 79.68 US cents (Overnight range: 0.7957 - 0.8066)
  • On Wall St, Dow +0.4%, S&P; 500 -0.1%, Nasdaq -0.6%
  • In New York, BHP +0.1%, Rio -0.3%
  • VIX +5.3% to 10.11 (Session range: 9.16 - 11.50)
  • In Europe, Stoxx 50 +0.1%, FTSE -0.1%, CAC -0.1%, DAX -0.8%
  • Spot gold flat at $US1260.17 an ounce
  • Brent crude +0.9% to $US51.45 a barrel
  • US oil +0.7% to $US49.07 a barrel 
  • Iron ore -0.3% to $US70.20 a tonne
  • Dalian iron ore +1.7% to 531 yuan
  • Steam coal +0.1% to $US87.30, Met coal +0.0% to $US165.00
  • LME aluminium - 0.2% to $US1938 a tonne
  • LME copper flat at $US6330 a tonne
  • 10-year bond yield: US 2.31%, Germany 0.53%, Australia 2.69%

with aap

Description  This column was produced in commercial partnership
   between Fairfax Media and IG

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