IG Markets - Afternoon thoughts - Dec 8

Across Asia, regional markets are weaker as investors tread cautiously ahead of this week’s key meetings in Europe. A report suggesting the G-20 is considering a $600 billion IMF lending program saw US markets charge higher late in the session. However, the IMF has since denied the report, which resulted in US stocks retreating in the last moments of trade. The lack of concrete proposals leading up to the summit has left investors growing increasingly pessimistic. The Nikkei is the worst performer in the region with a 1.1% drop, while the Hang Seng is down around 0.9% and the Shanghai is flat. The ASX 200 is down 0.2%. Despite the weakness we are seeing in the Asian region, US and European markets are pointing towards modest gains on the open after having had lost ground overnight and in anticipation of an ECB rate cut.

Australia's S&P/ASX 200 index is down 0.2% at 4285 with most sectors struggling. Pessimism is growing over the European situation. There has been a lack of confirmation of the plans that have supposedly been discussed and officials have denied some of the reports that lifted Wall Street this week, so it's hard for investors to be confident. Energy stocks are weakest, with Woodside Petroleum down 2% and Santos 3.6% lower. Consumer discretionary stocks are mostly underperforming, with David Jones 2% softer and Harvey Norman 1.2% weaker. Industrials are outperforming, with Brambles up 2.2% and Qantas 0.6% higher. Iluka has risen 6% after flagging higher prices, while Newcrest is 1.3% stronger after recent weakness. Among the big banks, National Australia Bank is the only one in positive territory with a 0.4% gain. Domestic jobs data released this morning disappointed, missing expectations and resulting in a sharp sell off for the Aussie dollar.

Finally, one of the big four banks made a move on interest rates, with ANZ Bank matching the RBA’s 25 basis point rate cut. Borrowers will be hoping the other three follow suit, considering the weakness we are currently seeing in economic conditions. This would also give some much needed relief to the struggling retailers. Today’s poor jobs numbers are just another indicator of how quickly things have slowed down, which probably prompted action from the RBA. These weaker trends are consistent with the lagged impact of slower economic activity from around the middle of the year. A sharp slowing in jobs growth and moderation in hours worked is likely to weigh on growth in household incomes into 2012 and amount to a significant headwind for growth in consumption.

We are in the eye of the storm for EUR/USD, with traders preferring to square off positions ahead of tonight’s ECB decision and Friday’s EU Summit. EUR/USD was picked up off overnight lows with reports (which were later denied) in the Nikkei publication that the G20 was planning to put together a $600 billion lending facility to the IMF, which, in conjunction with the potential firepower of the EFSF would see total funds of around $1 trillion. This piece of speculation epitomises trading at present, with headline after headline pushing price action around; yesterday’s Financial Times story that suggested the ESM would be brought forward to run in conjunction with the EFSF was denied by a German official, highlighting to many that perhaps it is simply better to sit out and wait for the facts to emerge.

Tonight will be the start of what promises to be a volatile yet fascinating journey for the single currency. The swaps market is pricing in an 89% chance of a cut, perhaps a touch conservative in our eyes given we feel there are risks we could even see 50 basis points being cut off the refinancing rate, but the real action will probably come when traders dissect the ECB’s statement. Traders will be keen to hear the ECB’s assessment on price stability, but also its staff projection for 2012 to which we would not rule out a sizable downward revision from the 1.3% GDP growth. There is also talk of providing more support to the banks in the shape of longer-term loans of up to three years, while also loosening collateral requirements for future loans. The journalist community will be fishing for clues on the future of the ECB’s bond buying program in the post-statement Q&A session, and many will be focusing on QE. However, given many members of the ECB have been outspoken about their distaste for unsterilised asset purchases; we expect the ECB will simply maintain its existing stance of ‘passive containment’ here. As mentioned, there are many highlighting that the next few days are pivotal, not just for the fortunes or sovereigns, but the entire banking system. It’s also worth mentioning we are hearing of some traders loading up on sizable EUR/USD put options at 1.25, suggesting they will see massive disappointment or asset purchases down the track by the ECB.

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