IG Markets - afternoon thoughts 6th October

IG Markets - afternoon thoughts

Across Asia, regional markets are all significantly higher, riding on the back of the current momentum on Wall Street. The Hang Seng and the Kospi are seeing gains of 4.5% and 3.8% respectively while the Nikkei 225 is enjoying a more modest advance of 1.9%. The Shanghai Composite is closed.

In Australia, the ASX 200 is currently 2.9% firmer at 4038, just off its earlier highs of 4052. After another session of healthy gains in offshore markets it is not surprising to see the local market building on yesterday’s strength. Gains for the day are broad based with all sectors in positive territory with the biggest advances coming from the materials, energy and financial sectors which have been heavily sold down over the last month.

After a second consecutive session of heavy gains for US markets, local investors have today seemed more willing to “double down” and keep buying as opposed to quickly booking profits. To see any meaningful and sustainable rally into year end this mindset will have to continue.

It seems the catalyst for this mini rally we have underway is a belief (or is it more of hope) that EU policymakers will finally be able to stem the rot that has destroyed the heart of the European economy. Be it a recapitalisation of banks, an expanded EFSF, or some form of Euro TARP, the market is looking for more than just talk. It is demanding action. While optimism seems to be growing that something will be done, the market could be setting itself up for failure, hence it might not want to get too far ahead of itself by pricing in a resolution that might not end up happening.

If a resolution is forthcoming we’ve had a sneak preview over the last few days as to what sectors and names will benefit the most. Over the course of August and September cyclical sectors leveraged to the global economy were hammered. Long positions were closed and large short positions established. While devastated on the way down, the same materials, energy and financial names that have borne the brunt of the selling stand to see the biggest snapbacks when sentiment eventually turns.

Cameron Peacock
Market Analyst
IG Markets

ENDS

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