IG Markets - Afternoon thoughts 3/11/11

IG Markets - Afternoon thoughts 3/11/11

Across Asia, regional markets are weaker after European leaders cut off aid payments to Greece and said a referendum in 5 weeks will determine whether the debt-strapped nation becomes the first to exit the euro area. The news has seen risk once again out of favour and equity markets fall. The Hang Seng is down 1.8%, while the Kospi is 1.5% weaker. Elsewhere in the region, the Shanghai is up 0.6% and the Nikkei is closed for a bank holiday.

Australia's S&P/ASX 200 index has defied a 1.5% gain on Wall Street to fall 0.3%, as investors remain cautious about Europe's debt woes. The market has extended its losses after France and Germany told Greece that a sixth tranche of aid won’t be paid unless the country adopts proposals outlined at last week’s summit. Retail sales numbers released this morning came in line with expectations, but did little for the market. Australian banks are more directly hurt by European issues as they fund much of their loan books with increasingly expensive offshore debt. ANZ reported a FY profit that was slightly below expectations, and its shares are down 0.9%, while Commonwealth Bank is 1% lower. Miners are faring better on higher commodity prices, with BHP Billiton up 1% and Rio Tinto higher 0.6%. Newscorp is up 3% after posting some strong quarterly numbers.

The headline risk in these markets remains extremely high, as evidenced by today’s price action. The Greek referendum will take place on December 4-5, which is probably sooner than some had expected and that is positive because the next tranche of aid will not be provided until we know if the Greek public are going to pass the referendum. Initial reports were suggesting that the vote will take place in January. Mr Sarkozy went on to say ‘it was up to the Greek people if they wanted to remain in the euro’. The whole thing has become a mess and will certainly keep risk assets shackled in the short term, on the premise that there is a real possibility that Greece may vote against the revised bailout and austerity and subsequently find themselves having to fund their massive deficit. With Greece having undone a lot of the hard work over the last few sessions, G-20 leaders are likely to keep pressing Greece to resolve the issue as swiftly as possible.

It is certainly crunch time in Europe now with the next few weeks set to be nail-biting. Some reports suggest that Angela Merkel said Europe is prepared in the event that Greece decides to exit the euro. With the possibility of a Greece exit now real, chances are the EU will be looking at how to handle and contain such an event. The G-20 summit will probably give the leaders an opportunity to start working on a contingency plan. Current volatility is likely to keep some investors out of the market. However, some traders will be looking to capitalise on the big moves and position themselves ahead of any key announcements. Locally, tomorrow brings the RBA’s monetary policy statement at 11.30am.

ENDS

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