IG Markets - Afternoon thoughts 1st November

IG Markets - Afternoon thoughts

Across Asia, regional markets are weaker after China’s official ‘Manufacturing PMI’ index fell to 50.4 in October from the prior month’s reading of 51.2. This result was well below a median forecast of 51.8. However, a consolation is the fact that the figure is still in expansionary territory (above 50). Concerns over Europe’s debt situation also continue to dampen sentiment. Japanese exporters received a short-lived boost yesterday on the back of a massive intervention by the government in the currency markets. However, the effect has now waned as the Nikkei is weaker. The Nikkei is down 0.9%, the Hang Seng is 1.5% weaker and the Shanghai is flat.

Australia's S&P/ASX 200 index is down 1% at 4254 after hitting a three-day low of 4234.7, with materials leading broad-based declines after steep falls in offshore markets and a weaker-than expected China Manufacturing PMI reading. The RBA has cut interest rates by 0.25% to 4.5% as expected. Volumes are light because of Victoria's Melbourne Cup horse race holiday, and the market is being weighed down by renewed concern over Europe. Scepticism (about the European financial stability plan) is being priced into the European bond markets and it's affecting risk assets. Commodity price weakness is weighing, with BHP Billiton down 2.3% and Rio Tinto lower by 3.4%. Banks are weaker between 1% and 2%. Consumer discretionary stocks are under pressure, with Harvey Norman, Myer and David Jones down significantly.

We have certainly started the month off on a soft note with plenty of bearish leads filtering through overnight. Going forward, risk is likely to continue coming under pressure until we get a better indication on where the European situation is headed. The problems started on Friday when mild interest in the Italian debt auction sparked fears that bond investors are still sceptical that the EU debt deal will actually calm the crisis. With China now reportedly not looking to get involved in a bailout and Greece unexpectedly announcing a referendum to approve a second EU bailout deal for the country, the headline risk remains rampant. This decision could heighten uncertainty surrounding the crisis. China’s weaker-than-expected PMI numbers today do not bode well for risk assets. It is likely to result in commodities unwinding after recent strength.

Today’s RBA rate cut has seen the Aussie market come off its lows while the Aussie dollar has lost ground to the greenback. The comments from the RBA’s statement suggest growth is moderate and seem generally neutral. However, the RBA highlighted it expects underlying inflation to be close to target (2-3%) in 2012-13. All the economic data we have been receiving including last week’s CPI numbers and a weak home sales number this morning has been suggesting we are getting closer to a rate cut. With a cut finally being announced, all eyes are now on the banks. Westpac and Commonwealth Bank have already announced cuts in line with the RBA. In major company announcements, WBC is set to report its FY11 results tomorrow morning.

Kind regards,
Stan Shamu
Market Strategist
IG Markets

ENDS

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