IG Markets - Afternoon thoughts 2/12/11

IG Markets - Afternoon thoughts

Across Asia, regional markets are mixed with the ASX and Nikkei stronger but the Hang Seng and Shanghai weaker. It has been a fairly muted session, with markets taking a breather after the massive gains posted this week. Investors seem to be waiting for the next catalyst after the rallies we saw this week were on major headlines. Regardless, Asian markets are on track for big weekly gains, with the Aussie market currently up 6.5% for the week. For the day, the ASX 200 is leading the gains in the region, with a 0.3% rise led by the defensive consumer staples and healthcare sectors. The Nikkei is up 0.2%, while the Hang Seng is down 0.3% and Shanghai 1.2% lower. In light of the mixed trading and tight ranges in the Asian session, US markets are pointing towards a flat open. However, after having been much lower than other regions overnight, European markets are looking likely to produce modest gains at the open.

Australia's S&P/ASX 200 index is trading 0.3% higher at 4243, despite some mixed leads from overnight trading. Weak European manufacturing data countered optimism over the US economic recovery. The gauge was marginally higher at 4,236.40, as surveys showed that manufacturing activity in the eurozone and the UK contracted at an accelerated pace in November, and shrank for the first time in nearly three years in China. BHP Billiton is down 0.7% today after base metals retreated overnight. The world's largest mining company jumped 4.1% yesterday, after central banks globally stepped up efforts to stabilise financial markets and China signalled a refocus on supporting growth. Rio Tinto, which yesterday advanced 4.7%, is down 0.2%. Australian financial companies have climbed; even after Standard & Poor's cut all four of Australia's big bank credit ratings. Commonwealth Bank is up 0.8% after saying it doesn't expect any material impact on its funding plans.

The S&P index comes into focus for traders tonight, with important economic data and key technical levels on the horizon. First up, we'll see US non-farm payrolls and unemployment rate data, and given we've seen some improvement in US data in recent times, bullish traders will be hoping this trend continues. The surprising strength in the US economy is helping to offset concerns over the rate of slowing in China and other emerging economies. On the technical side, two significant resistance levels loom on the S&P futures; the 200-day moving average sits at around 1255, and the downtrend line from the peak in July looms at around 1269, so traders will be watching to see if we can break out above these two levels.

S&P’s downgrade of the big four banks seems to have been a non-event, with the banks holding up fairly well today. The main theme across all asset markets is consolidation following huge risk rallies and ahead of major event risks starting with US non-farm payrolls tonight.

The single currency once again showed that traders are unsure about getting too bullish ahead of the key event risk over the next five days. EUR/USD did manage to trade to 1.3521 overnight, and again showed a lack of conviction from the bulls to push the pair convincingly above 1.35 in the short term.
Overnight, Spanish, Italian and French bond yields saw aggressive moves lower as France and Spain managed to meet the upper end of their issuance expectations, which supported risk assets. French President Nicolas Sarkozy also outlined his strategy for next week’s December 9 summit, which included monitoring other nations’ budgets and potentially imposing sanctions on countries that do not respect the stability and growth pact.

Tonight the market will be keen to hear what German Chancellor Angela Merkel has to say. German Finance Minister Wolfgang Schaeuble floated the idea of an off-balance sheet fund, however his proposal fell short of joint issuance of bonds (eurobond). There is also a positive buzz around trading floors at present, after ECB President Mario Draghi signalled that the ECB was open to acting more aggressively, provided European leaders impose the required fiscal discipline. This opens up the potential to see the ECB setting explicit targets for bond yields, and whilst they will continue to sterilise bond purchases (effectively stopping short of QE) the end game is to instil enough confidence in the bond market that sovereigns can fund their deficits in 2012 at better levels. Traders will also be looking at tonight’s US nonfarm payrolls with expectations of 125,000 jobs created in November. US data has been steadily improving and has rightly taken a backseat to Europe, but it must be said that expectations are high, so unless we see a number above 125,000 look for EUR/USD to attract sellers.

ENDS

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