IG Markets: Afternoon Thoughts (20/09/2011)

IG Markets: Afternoon Thoughts (20/09/2011)

Good afternoon,

Across Asia, regional markets are mixed following the negative overnight leads and news this morning that S&P had downgraded Italy’s credit rating to A from A+. There are also reports circulating suggesting Greek Prime Minister Papandreou is set to call a referendum over whether or not Greece should remain in the Eurozone. The Kospi and Hang Seng are the best performers, up 0.2% and 0.1% while the Shanghai Composite is 0.1% lower. The Nikkei 225 is down 1.4%.

In Australia, the ASX 200 is currently 0.9% weaker at 4043, having earlier traded to an intraday low of 4029. Despite speculation late in the US session that Greece might be close to convincing the Troika to release a further tranche of bailout funding, losses across global equity markets were still material, ensuring today’s local session would take on a similarly negative tone. While the defensive healthcare and consumer staples sectors are both in positive territory, it is otherwise a pretty bleak picture across the market with the materials, energy, and financial sectors all seeing losses in excess of 1%.

If the negative leads from Wall Street and European markets weren’t enough to send us lower, the S&P downgrade to Italy’s credit rating certainly was. What caught the market a little by surprise was that it was S&P rather than Moody’s, as the latter had flagged a few months ago that it had put Italy on credit watch negative. It’s just another piece of bad news that’s been added to the pile of junk that’s plaguing Europe.

Whilst we saw a negative response from equities, the euro and the AUD/USD the big question will be how traders respond when European markets open this evening. Will we see yields on Italian debt soar to new records and if so, will the ECB step in and buy bonds to try and limit the gains? I rather suspect traders were expecting it to a degree but that doesn’t mean participants won’t look to aggressively sell risk assets.

What we are seeing in both the US and Europe is an example of political risk at its finest. Theory always has it that political risk is the most damaging and this situation is showing us why. There is a complete lack of political cohesion in Europe with every one of the 16 EU nations putting their political agenda’s ahead of decisive steps for the greater good. It really is a joke, all being brought about by politicians trying to ensure they remain in power.

And the situation in the US is hardly much better. You’ve got a complete standoff between the Democrats and Republicans. President Obama seems to be doing his utmost to try and kick start the US economy but keeps running into political road blocks erected by the Republicans who are seemingly unwilling to comprise for the benefit of the nation. You only have to listen to a recent interview with House Speaker Boehner where he basically said that the republicans were not even going to consider tax hikes, even if they did make economic sense.

Basically, the US doesn’t have a functioning government and until next year’s election is over, it’s going to be very, very difficult to make much headway.

ENDS

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