IG Markets Afternoon thoughts

IG Markets Afternoon thoughts

Across Asia, regional markets are mostly weaker, as rising European bond yields are fuelling concerns that Europe will struggle to contain its debt crisis. The European debt situation is weighing on Chinese and Japanese exporters, and a stronger yen is also hitting Japan’s exporters after USD/JPY dipped below 77 overnight. The Nikkei is down 0.4%, the Hang Seng is 0.7% lower and the Shanghai is flat.

Australia's S&P/ASX 200 index is down 0.5% at 4285 on light volume, paring an early decline to 4276.5 despite a 1% fall in European and US equity markets. Investors will be encouraged by the move, considering the Aussie market has underperformed its global peers this year. The more defensive names are leading the recovery, with strong gains in the telecoms and healthcare stocks. Within the strongest sectors, the leaders are Telstra (+0.6%), CSL (+1.4%) and Computershare (+2.1%). In the cyclical space, energy is leading the way with strong gains for the uranium players. Uranium stocks have taken on a firm lead after Prime Minister Julia Gillard declared the present policy (Australia’s ban on uranium exports to India) outdated. Paladin is up 5.3% on the news. The financial and materials sectors are weighing on the market, with declines in some of the heavyweights. Commonwealth Bank is down 1.5% after saying that operating conditions remained challenging and net interest margins contracted in the first quarter. Spotless is up 2.6% after the Australian Financial Review stated that Pacific Equity Partners was finalising a takeover bid worth up to $700 million.

Today’s RBA Minutes have drawn mixed opinions, with analysts airing different views on what to expect on the interest rate front going forward. The RBA reinforced the fact that the November interest rate cut reflected a need for a more neutral policy. While the RBA seems to be airing on the side of caution, we feel significant downside risk to the global economic outlook will continue to be the dominant theme. Australia still has a relatively high interest rate compared to other developed nations to accommodate for the ongoing mining boom. Other factors to consider are that overall credit growth remains low and financial conditions on balance appear to be remaining somewhat tighter than normal. AUD/USD enjoyed a slight bounce following the comments but has since flattened out at around 1.02, indicating that investors are not convinced the RBA’s rate cut was a one-off. The answer to the RBA’s next move lies with Europe. Further deterioration in the European debt crisis will likely result in further easing, while stability in Europe will likely result in the RBA maintaining a restrictive stance.

We’re set for a big night with plenty of data due out in the Europe and the US tonight. Some of the data in the US includes CPI, PPI and retail sales numbers.

There seems to be real confusion at present which is keeping a lot of traders sidelined; this is perfectly summarised by the chart of the S&P 500 futures which clearly shows the lack of clarity seen by traders. Currently we can see from the triangle that we are at a clear inflection point where neither the bulls nor the bears are dominating. As it stands, our longer-term target is 1350, which is based off the double bottom formation from August 9 and October 4, however the shorter-term price action will be closely monitored. We are watching this closely, as a break either through support or resistance should provide clarity on traders confidence, with a potentially new trend developing. Given the interconnectivity of global asset classes, a move lower will invariably take the AUD, ASX 200 and other risk assets down with it.

Click for big version.

ENDS

© Scoop Media