IG Markets - Afternoon thoughts - Oct 28

Across Asia, regional markets are flying, extending yesterday’s gains, as European leaders achieved enough to wipe away any chance of systemic risk in the short-term. Yesterday’s announcement of a plan to deal with Greek debt and boost the firepower of the eurozone bailout fund by European leaders appeased the bulls. The financials have been notably buoyant across the region, with gains for big names like Nomura, Mitsubishi Financial Group and Macquarie Group. The Hang Seng is leading, with a 2.1% advance. Elsewhere in the region, the Shanghai is up 1.6% and the Nikkei 1.4% higher.

The Aussie market is up 0.1% at 4352 after hitting a three-month high of 4417.6 on the back of offshore markets reacting positively to the European financial stability plan. The index has significantly pulled back from the highs, pressured by weakness in some of the defensive sectors. Financials are the best performers, with major banks all in positive territory, and Macquarie Group up 4.8% after a 10% buy-back announcement offset a first-half earnings miss, plus a fiscal 2012 profit warning. Materials are also outperforming, with BHP Billiton up 0.7% and Rio Tinto advancing 0.4% after LME copper rose 6.1% Risk assets are performing well across the board. The defensive sectors are struggling, with telecoms, healthcare and utilities all in the red.

Today’s underperformance by the Aussie market is quite disappointing considering the rest of the region is still surging. We are not sure what this says about our market, but we are still 400 points, or 8.4%, below our break-even level for the year (4745). This can be compared to the Dow, which is up 652 points (5.6%) and the S&P, which is up 27 points (2.1%). Aren’t we supposed to be travelling so much better than the US and benefitting from our ties to China? A strong rally in AUD/USD could be contributing to our market’s underperformance.

On the charts, the market seems to have dropped after hitting gap resistance from the sell-off at the beginning of August. This move saw the market momentarily dip into negative territory. Should it fail to recover into the close, this rejection would have created a bearish pin-bar reversal candle for the market. These generally indicate a reversal in the short-term trend. However, further detail of the European bailout plan is likely to be a major focus for markets in the week ahead. Tuesday will also be an important day for investors, as the RBA is set to make its interest rate announcement.

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