IG Markets Afternoon Thoughts

FTSE – 5990 down 10
DAX – 7171 down 12
CAC – 4052 down 14

With most of Asian equity markets closed to celebrate Lunar New Year traders focused on Japan and Australia, with neither market seeing any conviction from traders to drive prices higher or lower. In afternoon trade the ASX 200 is the best performer, up 0.4% at 4817 whereas the Nikkei is down 0.2 at 10432.

In Australia, the ASX 200 spent most the morning oscillating around the 4800 level before convincingly pushing higher around midday as strong building approval figures and a trade surplus that was higher than consensus provided further optimism about the strength of the Australian economy. Material and Consumer Discretionary stocks put in the bulk of the points with News Corp and Tabcorp producing robust earnings reports.

The strength in the Insurers is another positive and after being sold off in recent times traders bought into names like IAG and Suncorp as relief spread that Queensland had not been damaged as much as some had previously anticipated by Cyclone Yasi.

Whilst the lead from Wall Street was lacklustre the fact we managed push higher despite tensions flaring up in Egypt and a situation which is far from being resolved has to be a positive and bodes well for future share price appreciation. Commodity prices remain at near record levels and show no signs of pulling back aggressively given the Fed are underpinning asset prices and this is helping to buoy resource stocks. Names like BHP and RIO are really putting in the points today and keeping the index in positive territory, both these names report in the next two weeks and given their extremely high levels of cash expect these stocks to perform well going into the results as the heat will be on Marius Kloppers and the BHP board to reward shareholders with a sizable buyback.

Turning the currency markets and whilst we saw a bit of a pullback in risk overnight the AUD had a positive Asian session as traders saw the economic data as a net positive. With the AUD only 1.4% away from making a new all time high we may need to see a fresh catalyst to get the bulls to push it through 1.0256, but with China limiting growth this year a case for a move back to parity at some stage is not out of the question especially as GDP in the 4TH quarter will struggle given the impact of the floods.

Two of the most interesting currencies at present are Sterling and the Euro which have performed extremely well in recent times With inflation clearly evident in the subsequent economies both the Bank of England and the ECB have the unenviable job of having to potentially raise interest rates when there are suggestions these economies are clearly not ready to handle this. Interest rate futures for both regions are pricing in a high probability of a move before mid year and that is driving these currencies. Tonight Jean Claude Trichet will speak and traders expect him to address these inflationary forces and whilst weekly jobless claims in the US, if sizable lower than 420,000 could see higher treasury yields and therefore USD strength, the overriding driving force for currencies at present is inflation and if the ECB provide a hawkish tone we could see the Euro push up and beyond 1.39. However, given how far the Euro has run in recent times a pullback in the Euro would not be out of the question if

Mr Trichet provides a softer tone on inflation.

Whilst sentiment took at step back last night with Germany seemingly against using the EFSF to buy periphery debt the Euro is in a clear uptrend, as is Sterling and with the Fed acknowledging inflation is still trending lower and with CFTC futures positions by no means stretched a short to medium bias is clearly favouring these currencies.

ENDS

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