IG Markets - Afternoon thoughts 20/4/12

Across Asia, markets are mostly weaker after US trade turned negative on the back of some disappointing economic data. Unemployment claims, existing home sales and Philly Fed manufacturing data all missed expectations. Over in Europe, Spain successfully sold €2.5 billion worth of bonds, but had to pay a high price in the 10-year period. However, any positive reaction to Spain and France bond auctions was quashed by rumours that France was going to be downgraded. The negative leads have filtered through to Asian markets where we are seeing some cautious trading with fairly tight ranges in a quiet session.

The Aussie market is relatively flat as it consolidates recent gains. We saw the local market match its April 2 high yesterday, but the index has failed to challenge that level again today. The European bond auctions haven’t been the binary event most expected, with risk sentiment failing to get a lift from the successful clearance. A weaker yen has failed to lift Japan’s Nikkei, which is down 0.4%. Elsewhere in the region, the Hang Seng has lost 0.2%, but the Shanghai Composite is a 0.6% higher. With no fresh leads from Asian trade, European markets look set to open lower. US markets are pointing to mild gains at the open.

With the US facing a decline in economic readings of late, further evidence of a US economic lull is bound to ramp-up expectations of another round of Fed QE. The FOMC and the BoJ policy decisions are likely to set the tone for USD/JPY for months to come, and USD/JPY is already creeping higher in anticipation. The BoJ is 'committed' to continued monetary easing in order to meet the 1% inflation goal. The upside for EUR/USD should continue to be limited by political event risk and the nervousness in the peripheral bond markets, where yields edged higher even though the Spanish auctions produced no major drama. Ahead today, the focus will be on the IFO numbers in Germany, the CPI data in Canada, and the G-20 meetings in the US. With little US data, traders may take their lead from GE who is expected to report Q1 adjusted EPS of 33 cents and $3.47 billion of revenue. GE, who source earnings from so many parts of the economy has the premise to move an equity market.

Australia's S&P/ASX 200 index is slightly lower, down 0.1% at 4358 going into the end of the week. This represents around a 0.8% gain for the week, should we hold these levels into the close. Once again, today we had some disappointing local corporate earnings comments, with Boral softer by 3.4% after cutting net-profit guidance by $22 million and Bradken declining over 11% due to a profit warning. Next week is going to be pretty significant for the Aussie market, with the much anticipated CPI data due out on Tuesday. The energy sector is outperforming, lifted by Oil Search which has risen 5% after saying it has found more gas in Papua New Guinea for its LNG project. The RBA has already flagged the CPI as the key ingredient for a May rate cut, which is now widely expected. As a result, the data will have a pretty strong bearing on how local equities and the Aussie dollar trade next week.

ENDS

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