IG Markets Afternoon thoughts

IG Markets Afternoon thoughts

Across Asia, regional markets have soared on improved optimism following some developments in the European debt crisis. Boosting sentiment are reports suggesting the IMF could offer Italy financial aid and news of the EFSF potentially insuring bonds for troubled countries. US Thanksgiving sales also topped estimates, marking a strong start to the holiday season sales. In response, we are seeing significant gains in Asian markets and for US and European futures. In the Asian region, the Hang Seng, Nikkei and ASX 200 have risen around 1.5% each while the Shanghai Composite is up half a percent. Given the gains we have seen in Asian trade, US markets are now pointing significantly higher after having failed to hold on to early advances on Friday night. European markets are also facing a strong open, extending the gains they logged Friday night.

Australia's S&P/ASX 200 is up 1.7% at 4053 on broad-based gains in the Asian region. Tangible evidence that US consumers are happy to buy deeply discounted goods on the closely-watched ‘Black Friday’ sales was certainly a positive and suggested the US consumer is still happy to spend despite 9% unemployment rates and an economy growing at a lacklustre 2%. The other catalyst was a report in Italian publication La Stampa, which suggested the IMF were ready to provide a loan of between EUR400 billion and EUR600 billion with an interest rate of 4 to 5% to Italy. This in theory would give Italy 12-18 months to implement reform and win over the trust of the bond market, however what is unclear is where the money is coming from.

The financial and materials heavyweights are leading the charge higher However, volume remains thin, suggesting some investors are wary of the potential for the European debt crisis to eclipse strong US Thanksgiving sales this week. Economic data is a sideshow to the macro events. If Europe goes into a massive recession, we will get global economic weakness. That's why there is a massive risk premium in equities. Unfortunately we are at a very big tipping point, where markets aren't giving European leaders time for austerity measures to work. As a result, we really could see things spiral out of control this week. Some traders will be looking to sell into the current rally early in the week.

We are facing a big week ahead as investors grow increasingly optimistic that European leaders are closer to finding a solution to the European debt crisis. There is a lot for investors to look out for including yet another round of bond auctions in Europe including Italy, France, Belgium and Spain. Investors had grown increasingly nervous after Germany failed to spark enough interest in its bunds last week. Traders will also be looking for clarity following reports the EFSF may also be planning to insure bonds of troubled countries. Guarantees of between 20% and 30%, and the setting up private funds with investors are among the solutions to be considered by finance ministers this week. Investors will be looking ahead to a meeting for euro-area finance ministers on November 29, as they continue to try and rescue the region from the debt crisis. The meeting could be a key catalyst to how the market performs going into the end of the year.

Some analysts have discredited La Stampa reports surrounding IMF financial aid for Italy saying the fund simply does not have such resources. This has seen the market pull back over the past hour. As of September the IMF had $385.5 billion of forward commitment capacity, so even if they designated their whole fund to Italy it would be well below the amount that has been speculated. It would require huge increases in contributions from other nations; which in turn would need to be approved by the US congress. Given the disappointment traders have experienced in the last 12-18 months, it is hard not to feel that this idea La Stampa is running as nothing more than a pipeline dream. The bears out there will know that markets do not go down in a straight line and this could be just a relief rally in what will prove to be a prolonged bear market. As a result, without being overly pessimistic, traders will be waiting for a bit more confirmation before rushing back in to equities. A break of the downtrend resistance line which has been in place since April would also be a good sign for the Aussie market. The market seems to be desperate for some good news after the long losing streaks suffered by equity markets over the past couple of weeks.

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