IG Markets - Afternoon thoughts - Nov 18

Across Asia, regional markets are weaker after picking up a negative lead from US and European markets. Fresh concerns over Europe’s debt crisis amid rising borrowing costs are causing heightened risk aversion. Spanish government bonds hit a euro-era high ahead of this weekend’s election, leaving global markets on edge. Around the region, the Shanghai is down 1.4%, the Nikkei has lost 1.3% and the Hang Seng has declined 1.8%.

Australia's S&P/ASX 200 index remains soft after hitting a two-week low of 4180.4 following a 1.7% fall in the S&P 500, as Europe's debt crisis worsened overnight. There's been no let up in the crisis, with no sign of officials deciding on anything that's going to calm markets. Materials names are leading broad-based declines after a tough night for commodities and other risk assets. BHP Billiton, Rio Tinto, Newcrest and Fortescue Metals are down between 1.5% and 2%. Energy stocks are also underperforming, with Woodside, Santos and Oil Search all lower between 1.3% and 2.5% after Nymex crude oil fell 3.3% to US$98.82 overnight. Volume continues to be light, indicating that investors are remaining cautious. The index is down 1.5% at 4194.

Spain will be heading to the polls this weekend after a shocker of a week in the bond market. Last night, the Spanish Treasury issued EUR3.6 billion of 10-year bonds at an average yield of 6.975%, their highest level since 1997. Many consider these levels unsustainable after the demise of the likes of Greece and Portugal when their yields hit similar levels. Opinion polls in Spain are predicting that the ruling Socialist party will be toppled. However, we have seen little reaction to the prospect of a new government. Recent leadership changes in Italy and Greece have failed to drive the market to a sustainable recovery, suggesting it will take much more than a leadership change to appease investors.

Today’s weakness saw the small cap stocks heavily sold off as investors lost confidence. Market participants seem to be getting back to basics and looking for quality businesses with a long history of earnings growth and good dividend paying capacity. The smart money will come out on top once the eurozone issues blow over. Tonight is going to be an enticing session after the technical-driven move we saw on the S&P last night. This morning we mentioned that the losses accelerated as soon as the S&P broke below the previous consolidation pattern. The charts are pointing to much weaker numbers on the S&P 500 and the bulls’ resolve will be tested over the coming sessions. On a three wave projection, some technical analysts are looking at targets of around 992 once the neckline support is broken. Please refer to the chart below. The data calendar is relatively light, but ECB President Mario Draghi will be speaking and investors will be looking for further insight on his position towards an expansion in the ECB's bond purchases.

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