IG Markets - Morning Prices Dec 6

US markets gave up most of their early gains after the Financial Times reported that S&P may strip Germany and France of their AAA credit ratings, with all 17 euro-nations on ratings watch. Early advances had been triggered by news that German Chancellor Angela Merkel and French President Nicolas Sarkozy pushed for a rewrite of the European Union’s governing rules to tighten economic cooperation. Also lifting sentiment was a drop in Italian borrowing costs following new austerity measures by the Italian government.

Among the major averages, the Dow Jones Industrial Average climbed 0.7% to 12098. The S&P tacked on 1% to 1257, while the NASDAQ advanced 1.1% to close at 2656. There was also some disappointing economic data out of the US, with a weaker-than-expected ISM non-manufacturing PMI number.

There certainly seems to be some progress in Europe, with leaders showing a sign of unity in devising a solution. European leaders aim to implement automatic penalties for deficit violators and locking limits on debt into euro states’ constitutions. They aim to reach a consensus on the changes required by March. Expectations have elevated now and, markets now seem to be pricing in significant action by European leaders after Angela Merkel and Mr Sarkozy agreed on a number of reforms.

Traders will have a keen eye on the RBA’s interest rate decision at 2.30pm today, and it seems like it will be a close call. Swap markets are pricing in an 84% chance of a rate cut, while 13 out of 25 economists surveyed by Bloomberg expect a 25 basis-point rate cut. As a result, should we not get a rate cut, we expect to see significant downside in the equity market and upside in the Aussie dollar.

Despite the gains seen in European and US markets, we are only calling the Aussie market up 0.1% at 4326, as we already had a strong rally yesterday. On the economic front, traders will also be looking out for the current account numbers at 11.30am.

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