IG Markets Afternoon thoughts

IG Markets Afternoon thoughts

Across Asia, regional markets are weaker as investors tread carefully on the back of escalating European bond yields. A lower revised US GDP number for the third quarter also put a dampener on sentiment. The revised number came in at 2% after an initial estimate of 2.5%. The losses have accelerated during the Asian session on the back of weak economic data from China and reports that the Dexia bailout may be on the verge of collapse. China’s HSBC PMI manufacturing number came in at 48, hitting a 32-month low and below the desired minimum 50 expansionary level. Around the region, the Shanghai is down 0.5%, the Hang Seng is 1.9% lower and the Nikkei is 0.4% weaker.

Australia's S&P/ASX 200 is down 1.7% at 4063 on light volume before Thursday's US Thanksgiving holiday, after falling to 4062 in reaction to the Chinese HSBC PMI manufacturing number. The market hit a fresh six-week low with the materials leading the decline. Iron ore miners are underperforming after JPMorgan lowered its iron ore price forecasts, with BHP Billiton down 2.9% and Rio Tinto down 1.8%. OneSteel has extended its losses, dropping over 6% after yesterday’s sharp sell-off. Financial names are also weighing on the market, with major banks down between 2% and 2.5% on offshore peer weakness Brambles is up 2.5%, enjoying a bounce after yesterday's sell-off. Energy stocks were outperforming earlier following a rise in oil prices, but have since turned lower along with other resource stocks.

Today’s HSBC manufacturing PMI data out of China follows on from some of the comments we heard from Chinese Vice Premier Wang Qishan's earlier this week in the Financial Times that the world will enter a long-term recession. With industrial production growth tipped to slow further, risk assets are in for a tough time. Investors would have really wanted to see yet another expansionary figure (above 50) as we saw last month. The European crisis seems to be now taking a toll on the world’s fastest growing economy. There have already been reports suggesting that China will cut the reserve requirement ratio this year because the M2 growth is very slow. It was also suggested that the People’s Bank of China will keep rates at a reasonable level to ensure that money can fund real economic activity. However, in the near term, there are too many negative factors weighing on the market.

Again today, the talk on the floor is how resilient the EUR has been relative to the USD in the face of the massive stress occurring in the eurozone. Reports overnight that Commerzbank may need up to EUR $5 billion more capital than previously thought is only adding to the growing concerns that liquidity is drying up, hence European banks are heavily repatriating funds to build capital, which in turn is the reason that EUR/USD is supported below 1.35. It was interesting to see an overnight move up to 1.3569 when the IMF introduced new credit lines. However this proved short-lived when economists calculated that it would enable Italy to borrow around EUR $91 billion; small change when its borrowing costs for 2012 is over EUR $300 billion. During Asian trade, an article posted on Zerohedge website suggesting that the Dexia bailout may be on the verge of collapse saw EUR/USD pullback below 1.35, and may weigh on the single currency during European trade. Liquidity is drying up a touch with Japan on holiday today ahead of Thanksgiving in the US on Thursday, which in theory could see volatility kick in tonight, given the events.

China’s disappointing manufacturing numbers add to the chaos we have seen in European markets. European growth is also a major talking point at present as a result of the austerity measures governments are trying to install; European manufacturing PMI numbers will therefore be closely watched, with manufacturing expected to marginally deteriorate to 46.1 (from 46.5), re-enforcing the view that a deep recession is imminent and deflation is not far off either. We will also get the findings of the European Commission’s report on major changes to the fiscal rules for EU members. This should include the idea of joint eurobonds, which should, given that for so long it has been a possible longer-term solution for solving the structural issues in Europe, see some caution from euro shorts, as this is a market devoid of any good news. We could also start to see investors grow increasingly optimistic of some action from China following the slowing growth.

Kind regards,

Stan Shamu
Market Strategist
IG Markets
www.igmarkets.com.au

ENDS

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