IG Markets Afternoon thoughts – July 29

IG Markets Afternoon thoughts – July 29

Across Asia, regional markets are all lower following the far from convincing overnight leads and as investors remain highly cautious ahead of crucial US debt ceiling developments likely to unfold over the weekend. The Hang Seng and Kospi are the worst performer, both down 0.8% while the Shanghai Composite and Nikkei 225 are both 0.6% lower.

In Australia, the ASX 200 is currently 08% weaker at 4431, just above its intraday low of 4421. With markets now focused on last minute weekend crisis talks to resolve the US debt ceiling issue, investors are understandably nervous with a potential default looming early next week. As expected losses on the day are relative indiscriminate with market participants lightening their exposure to equities in the event of a pending US default. The healthcare and materials sectors are seeing the biggest percentage declines with more modest selling being evident across the consumer, financial and energy sectors.

The market was trading around the flat line for most of the morning session as the market awaited a vote from the Republicans over their proposed debt deal. However, the scheduled vote was postponed as the Republicans were struggling to get the support needed to pass the bill. This saw markets fade away in light trade, with the ASX 200 falling through crucial 4500 support levels to trade to 10-month lows. This latest development has cast even more doubt on whether or not a deal can be done over the weekend as it fuels concerns over a lack of unity within the Republican party.

To be brutally honest no one really thought we would ever get to this situation. We’re basically standing on the edge of an abyss peaking over, with the bottom nowhere to be seen. That’s the situation facing all financial markets heading into a weekend that could prove to be one of the most crucial in history.

The more one ponders what might happen to financial markets should the US default, the more you come to the conclusion that they will get some sort of deal done. As we’ve said all week, it’s going to involve significant comprises on both sides of the fence; we just hope both parties can agree to disagree for the common good.

A deal basically has to get passed before Asian markets open for trade on Monday morning or risk significant fear based selling that could rapidly get out of control.

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