Global Markets Overview – August 26, 2014

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By Evan Lucas, IG Markets Strategist | August 26, 2014 9:52 AM EST

Jackson Hole moves the US to 2000

 The reactions from the US and Europe to the news out of Jackson Hole over the weekend were as expected - green on the equities front and red for the EUR.

German two year notes fell to 0%, the lowest read since 2012, as the papers were bid up on speculation the ECB will have to stimulate. The interesting situation here is how possible stimulus will be distributed across the monetary union. Unlike the US where it is one country, the European Monetary Union is 18 individual countries with substantially different contribution weightings. Part of the Maastricht Treaty stipulates that, if stimulus was to occur, it needs to be on a weighted basis. The issue here is Germany, the largest weighted nation, does not require stimulus, whereas Portugal does.

This is why Mario Draghi has a very thin line to walk. He's bound by laws that govern the whole zone but really needs to target individual economies. General stimulus could cause inflation issues in Germany, and are likely to not even get close to giving Portugal the assistance it requires.

The June meeting of the ECB did define a form of 'QE' was coming. The question will be how it implements its version. From November onward, the ECB meetings will be keenly watched as more and more information filters through about how the program will operate. Watch this space.

In the US, Jackson Hole saw the dollar moving to an 11-month high and the S&P crossing the 2000 point mark for the first time in its history (intraday move, closed at 1997). The stark talk from Fed chair Janet Yellen, who held to her long-standing narrative around employment, continues to support the long trade.

There was no data overnight that was really going to affect the S&P's move higher. Stimulus talk coming from the EU and Japan will also drive it higher - funds from these regions are likely to flow out of these nations and into the US as it continues on its growth trajectory.

Ahead of the Australian open

 The moves in the US and Europe will drive Asia higher today, particularly in the currency markets. The strongest correlation in the market - the inverse relationship between the yen and the Nikkei - will move the Japanese bourse higher this morning.

The more the BoJ and Governor Kuroda alludes to increased stimulus, the further yen will fall and the higher the Nikkei will move. The relationship has a 73% correlation and is likely to drive everything in Japan for the foreseeable future.

Staying on that theme of market drivers, two bottom-up events are likely to drive the Australian market over the coming weeks: the falling iron ore price and the CBA dividend reinvestment plan.

Iron ore closed below US $90 a tonne for the first time since June. However, unlike in June when China's stimulus packages were kicking in, this time rebar prices and demand are adding to the downward pressure on the price. This will heap enormous pressure on the material space and provide a drag to the ASX's match to 5700 points. On the other side of the ledge, CBA's DRP programme begins today.

History shows that 25% of holders will take up the program over the coming weeks. On that basis, approximately $900,000 of buying support is likely to aid CBA over the coming week and could balance out falls in the material space.

On that basis and the futures market, we're currently calling the ASX 200 up five points to 5640. However, the real moves will come when China opens at 11.15am AEST and it continues to assess demand for steel and industrial metals. If it slides, so will the ASX.

Asian markets opening call

Price at 8:00am AEDT

Change from the Offical market close

Percentage Change

Australia 200 cash (ASX 200)

5,640.20

5

0.09%

Japan 225 (Nikkei)

15,585.20

135

0.88%

Hong Kong HS 50 cash (Hang Seng)

25,188.20

76

0.30%

China H-shares cash

11,096.00

37

0.34%

Singapore Blue Chip cash (MSCI Singapore)

378.60

0

0.05%

US and Europe Market Calls

Price at 8:00am AEDT

Change Since Australian Market Close

Percentage Change

WALL STREET (cash) (Dow)

17,077.00

-12

-0.07%

US 500 (cash) (S&P)

1,997.09

-3

-0.15%

UK FTSE (cash)

6,809.80

3

0.05%

German DAX (cash)

9,482.10

25

0.27%

Futures Markets

Price at 8:00am AEDT

Change Since Australian Market Close

Percentage Change

Dow Jones Futures (September)

17,055.00

-14.00

-0.08%

S&P Futures (September)

1,994.75

-2.63

-0.13%

ASX SPI Futures (September)

5,603.50

8.00

0.14%

NKY 225 Futures  (September)

15,597.50

-45.00

-0.29%

Key inputs for the upcoming Australian trading session (Change are from 16:00 AEDT)

Price at 8:00am AEDT

Change Since Australian Market Close

Percentage Change

AUD/USD

$0.9298

-0.0022

-0.24%

USD/JPY

¥104.050

-0.150

-0.14%

Rio Tinto Plc (London)

£34.13

-0.20

-0.60%

BHP Billiton Plc (London)

£19.40

-0.31

-1.57%

BHP Billiton Ltd. ADR (US) (AUD)

$37.35

0.10

0.27%

Gold (spot)

$1,276.60

-0.85

-0.07%

Brent Crude (October)

$102.67

0.55

0.54%

Aluminium (London)

2064

5.50

0.27%

Copper (London)

7089

61.75

0.88%

Nickel (London)

18750

-126.00

-0.67%

Zinc (London)

2349

-7.50

-0.32%

Iron Ore (62%Fe)

89.2

-0.90

-1.00%

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(Photo: / )
A placard reading "You speculate with our lives" stands next to huge euro logo in front of the headquarters of the European Central Bank (ECB) before the bank's monthly news conference in Frankfurt August 7, 2014. The European Central Bank left interest rates unchanged on Thursday, holding off fresh policy action as it prepares to launch fresh funding for banks next month that it hopes will lift inflation from rock-bottom levels. REUTERS/Ralph Orlowski (GERMANY - Tags: BUSINESS POLITICS)
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