IG Markets - Afternoon thoughts - 2/7/2010

IG Markets - Afternoon thoughts - 2/7/2010

Across Asia, regional markets are mixed following modestly lower overnight leads from the US and a boost in sentiment across the mining space after Australian PM Gillard reached an agreement with mining companies on a resources tax. The Nikkei 225 is the best performer, up 0.3% while the Hang Seng, Kospi and Shanghai Composite are all down between 0.4% and 1.4%.

In Australia, the ASX 200 is currently 0.1% lower at 4240.6 having traded as a high as 4281 earlier in the session. The initial enthusiasm generated by the revised Minerals Resource Rent Tax (MRRT) has waned in afternoon trade as the market plays out a tug-of-war between the positive aura created from the new tax and the currently poor global sentiment. The materials sector, which has been in the spotlight today has given up all of its gains and is currently one of the weakest performers. Elsewhere, the heavyweight financial and energy sectors have also given up healthy gains and rolled over into negative territory.

Whilst the changes to the MRRT are very positive, the market is clearly focused on the bigger macro picture. At the end of the day, if markets globally are going to continue to make new lows then it’ll be very tough for the local market.

It looks like investors are taking money off the table ahead of a crucial non-farm payrolls number this evening and Monday’s Independence Day holiday in the US. There’s a lot of negative sentiment in the market at the moment so a people are taking the cautious approach and reducing their exposure.

Ahead of tonight’s employment report, the market is looking for its first negative headline number in five months with job losses of more than 130,000 expected. What will likely be of more interest to the market is the level of private sector jobs creation, which is predicted to be in the vicinity of 110,000 new jobs.

The last few months data has been artificially skewed by census hiring’s which should now have worked their way out of the system. We’re also hearing anecdotal evidence that average hours worked are increasing as employers stretch their current workforce instead of increasing headcount.

Given the recent negativity, we believe the market has more than priced in a bearish number and feel if tonight’s data is anything near expectations, we could see some form of a relief rally as markets are generally seen as oversold.

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