IG Markets - Afternoon thoughts 14th October

Good afternoon,

Across Asia, regional markets are stronger after Italy’s latest steps to alleviate its debt woes were cheered by investors. On Friday, Italy passed an austerity budget and has now moved towards appointing a new leader after Prime Minister Silvio Berlusconi’s resignation. Around the region, Japan is enjoying a strong day after its Q3 GDP showed a 1.5% expansion, in line with expectations. This growth was well received after the last three quarters showed contraction. The Hang Seng is leading the region with a 2.4% gain, the Nikkei is up 1.2% and the Shanghai is 1.4% higher.

Australia's S&P/ASX 200 is up 0.5% at 4317 after printing a high of 4363.1. This was in reaction to Friday's 2% rise in the S&P 500 and positive weekend developments including stronger-than-expected new yuan loans data plus the appointment of former EU competition commissioner Mario Monti as Italy's interim national unity government leader. The cyclical sectors are leading broad-based gains, with energy, industrial and financial names outperforming. Woodside, Brambles and Commonwealth Bank are up between 1.6% and 2.6%, while BHP is firmer by 0.4%. Unfortunately, the relatively low volume has seen the market come off its highs.

In company news, Leighton Holdings and Bluescope Steel are trading over 3% higher after receiving some broker upgrades. The two stocks have struggled for most of this year. Paladin has jumped over 9% after more than doubling its first quarter revenue to US$103 million.

The focus will now turn to Italian and Spanish bond auctions this week. There is a chunk of bond auctions this week starting with Italy today, Germany Wednesday and France and Spain Thursday. Investors will now be watching to see how Europe reacts to the developments out of Italy and whether the ECB will support the Italian bond market more forcefully this week. A newspaper report over the weekend suggested the EFSF was forced to buy several hundred million euro of its own bonds, which was later denied by EU officials. This puts doubt on the future of bond issuance given the lack of support from some countries that Europe felt it could rely on.

In the US, we are now approaching the Super Committee deadline for the Committee to come up with measures to the government budget. However, recent data out of the US has been encouraging which could see investors remain optimistic about the US economy. Despite all the negative news out of Europe last week, markets held up relatively well, indicating that there is a lot of optimism out there. The appointment of technocrat governments in Greece and Italy will likely appease the bond markets in Europe. All in all we are in for a big week, which could see the start of a solid recovery across equity markets. However, many investors will still be cautious as the headline risk remains high.

Kind regards,
Stan Shamu
Market Strategist
IG Markets

ENDS

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