IG Markets - Afternoon thoughts 24/11/11

IG Markets - Afternoon thoughts 24/11/11

Across Asia, regional markets are mostly weaker after a broad sell-off in global markets overnight. Deepening concerns about the European debt crisis continue to weigh on markets after a poorly-received German debt sale. Japan has returned to trade today after yesterday’s holiday. As a result, the Nikkei is the worst performer in the region as it catches up to some of the losses logged in the Asian district yesterday. However, markets in the region have pared losses and are well off their lows. The Nikkei is down 1.4%, the Hang Seng is 0.7% higher and the Shanghai is relatively flat. The Aussie market is up 0.2% on the back of strength in the resource heavyweights and the big banks. Looking towards tonight’s session, US markets are closed for the Thanksgiving holiday. European markets are now pointing towards gains on the open following the recovery we have seen in the Asian session. After having seen eight successive negative sessions in European markets, we might finally see a bounce.

Australia’s S&P/ASX 200 is 0.2% higher at 4058 despite bearish offshore leads. The market printed a seven-week low of 4029.5, but has since recovered as investors start to seek value in high yielding stocks. Gains in large-cap stocks are supporting the market, with financial names leading the charge. All the big four banks are stronger, with Commonwealth Bank the best performer, up 1%. Mining heavyweights BHP Billiton and Rio Tinto are also trekking higher despite a poor night in the commodities space. Woodside Petroleum, Westfield and Newscorp have all gained ground. Murchison Metals has jumped 50% after announcing some asset sales. David Jones is trading lower after its quarterly sales update failed to impress. There is also weakness in the healthcare and utilities space. It seems some funds are switching from the defensives to the cyclical plays.

Apart from some of the disappointing economic data we received over the past couple of days, recent data has actually been fairly positive. Indeed, Europe seems to be putting a dampener on the global economic recovery, but it is also important to note that the selling has been going on for a while now and there is still a lot of value out there. Today’s surprising recovery could be simply due to the fact that the sellers are exhausted and investors are looking to take advantage of recent share price weakness to snap up some blue chips. However, it is still a headline market and there is still a lot of risk out there with Europe at the centre of the chaos.

Despite the optimism we have seen today, alarm bells are ringing through Europe and euro bears must be smiling at the prospect that EUR/USD looks destined to test 1.3146 (October 4 low) in the not-too-distant future. European PMI figures showed that Europe is heading into recession and came out below the expectations of the market. However, it was the German bund auction that was the key catalyst to push the single currency down to its session low of 1.3320. The German government was only able to sell EUR 3.644 billion of a proposed EUR 6 billion of ten-year bunds, which makes an effective bid to cover a ratio of just 0.65x and perhaps their worst on record. The German debt management agency was quick to state that the low participation was a function of nervous market sentiment as opposed to a ‘refinancing bottleneck’. This has led traders to question whether Germany has been caught in the contagion worries. What is worrying though is how weaker nations like Italy refinance EUR 300+ billion through the primary markets (bond auctions) next year when the all-powerful and fiscally-responsible Germans are having massive difficulties. Fitch also added to the EUR woes, indicating that France’s credit rating was at risk; one has to think if France increases its contribution to Dexia’s bailout, it could be the straw that breaks the camel’s back. On a more positive note, Germany’s highly regarded Bild newspaper reported that German backing for the issuance of joint eurozone bonds is no longer being categorically ruled, which could worry a few traders sitting on profitable short EUR/USD positions and will no doubt get more airplay ahead of the EU summit on December 9. There is a good chance we could see EUR/USD push back to 1.3406 in the short term (76.4% retracement of the rally from the October 4 low), although we would continue to use any strong moves higher as a selling opportunity. A close below here tonight though would certainly argue that EUR/USD is headed to 1.3146 sooner rather than later.

ENDS

© Scoop Media