IG Markets Afternoon thoughts – Oct 7

Across Asia, regional markets are all significantly higher after US markets stretched their rally into a third consecutive day. The Hang Seng and the Kospi are seeing gains of 2.8% and 2.6% respectively while the Nikkei 225 is enjoying a more modest advance of 1.1%. The Shanghai Composite is closed.

In Australia, the ASX 200 is currently 2.4% firmer at 4169, just off its earlier highs of 4180. 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.

Yesterday we wrote “If a resolution is forthcoming (to the issue in Europe) 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”.

This thematic certainly seems to be playing out at the moment. Money is flowing back fastest into those stocks that were hammered the most during the August/September rout. Names like Karoon, Paladin, Western Areas, Fortescue, just to name a few have been well bid this week. All are market darlings and all have been hammered over the last two months. A change in sentiment is a powerful force and we are currently witnessing how quickly money can come back into beaten down names/sectors.

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