IG Markets - Afternoon thoughts 4th May

Good afternoon,
Across Asia, regional markets are all lower in early afternoon trade following modestly weaker leads from the US and declining commodity prices. With Japan observing the ‘Greenery’ day holiday, volumes are on the lower side. The Hang Seng is being hit the hardest, down 1.3% while both the Kospi and Shanghai Composite are 1.1% lower.

In Australia, the ASX 200 is currently 1% weaker at 4735, just off its lows of the session. Flat to weak offshore leads were never going to be enough to support our market which is clearly trading with a downside bias. While yesterday’s less hawkish-than-expected RBA statement has helped take the steam out of the AUD, currency headwinds are continuing to buffet the local index. Losses for the day are again broad based with the materials, energy and financial sectors continuing their recent slide.

As well the being concerned about AUD-related profit downgrades during confession season, there is a lot of uncertainty over next week’s federal budget and what the government may do to raise much needed revenue. Now that the RBA meeting is out of the way, participants have turned their focus towards next Tuesday budget.

There are some fears in the market that Treasurer Swan may look to crack down on negative gearing of investment properties. There is no doubt that negative gearing has been a major driver of house prices over the recent decade. If the government did overhaul negative gearing, it would almost certainly have a profoundly negative impact on the housing market. This would ripple through the broader economy as property as a genuine investment asset would become significantly less attractive. Nonetheless, until this event is done and dusted and the market has some certainty, we’re unlikely to see much commitment from traders.

In currency markets, there’s been further evidence of money flowing out of risk currencies during the Asian trading, with the NZDJPY down almost 1.3% earlier in the day. This provided the lead that saw both the AUDUSD and EURUSD come under pressure. The AUDUSD hit a session low of 1.0788 before rebounding to around the 1.0817 level; the EURUSD is sitting just below 1.48 handle after touching 1.4774. A lower than expected Chinese yuan fixing also weighed on both currencies as the USD attracted buying.

Ben Potter
Market Strategist
IG Markets

ENDS

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