IG Markets - Afternoon thoughts 15/12/11

IG Markets - Afternoon thoughts

Across Asia, regional markets are weaker after picking up a negative lead from the US and Europe. It was a night of clear risk aversion, with traders simply fearing slower economic growth globally. With no key dates to get excited about, hope seems to be dissipating. Rising European borrowing costs did not help the situation. Sentiment around the region has also been dampened by some economic data out of China and Japan. China’s HSBC flash manufacturing PMI number came in at 49 (below the key 50 level and in contractionary territory) and Japan’s tankan index fell to -4, which was below expectations. The resource-heavy ASX 200 is leading the broad-based declines, with a 1.5% drop after a poor night for commodities. Elsewhere in the region, the Nikkei and Shanghai are down 1.3% each. US and European markets are pointing towards a relatively flat open, with potentially slight gains for Europe.

Australia's S&P/ASX 200 index is down 1.5% at 4127, as concern about France's credit rating caused risk aversion in global markets. Resources are leading broad-based declines, with BHP Billiton and Rio Tinto down over 2% each, while Fortescue Metals is nearly 4% lower. Gold stocks are among the worst performers in the materials sector, with Newcrest Mining losing 3.5% after gold slipped overnight. In the energy space, Woodside Petroleum has dropped just over 2% after a sharp decline in oil prices overnight. Consumer discretionary stocks and property trusts are outperforming, with Ten Network up 5.4% and Westfield half a percent higher.

Sellers have eased back a touch in Asian trade after EUR/USD traded down to 1.2946 overnight, only 79 pips from the year low. It seems that the rug has been firmly pulled from underneath the euro, as traders focus on growth prospects (or lack of them) relative to the US, while realising the only certainly over Europe is more uncertainty. There really wasn’t much to smile about last night; Italy sold the maximum targeted amount of five-year bonds, albeit an era high price with ten-year yields closing back above 7% as a consequence. Bundesbank President Mr Weidman suggested that ‘the idea that the required money will be created through the printing press should finally be brushed aside’, again highlighting that we are a long way away from the ECB doing what many believe needs to be done, - printing euros. The threat of a raft of ratings downgrades continues to hover, and while Fitch downgraded several European banks in early Asian trade, rumors of a French downgrade are ever present and like Mr Sarkozy yesterday, French foreign Minister Alain Juppe tried to cushion the potential fallout by saying a rating downgrade wouldn’t be ‘cataclysmic’. We think perhaps one of the most worrying statistics recently released was that the level of cash on deposit at foreign owned banks operating in the US has dropped 25% in the last six months, with around $290 billion being withdrawn. These are massive numbers and this clearly illustrates the worry investors have over the longevity of these institutions. The path of least resistance is clearly down for EUR/USD, however we have seen a 400 pips move lower in the last three days, so we would caution against initialing fresh shorts here, although the risk of action by S&P would certainly cause a sharp move lower. Failing a rating downgrade, it would not surprise us to see a move back to around 1.31 as shorts take profits. EUR/CHF will be of huge interest tonight given the expectations that the SNB (Swiss National Bank) will move the floor on EUR/CHF to 1.25.

There is a raft of economic data being released in the US tonight, which might dictate sentiment in the absence of any surprises from Europe. Weekly unemployment claims numbers and monthly PPI data (a leading indicator of inflation) are both due at 12.30am. Unemployment claims are expected to rise to 389,000, while the PPI is expected to show a 0.3% increase. We'll also see Philadelphia Reserve Bank release its manufacturing index number at 2am, with a reading of 5.1 expected. Of particular interest to traders will be the PPI data. After embarking on two rounds of quantitative easing and the subsequent increase in debt, the Fed has remained steadfast in its refusal to print money again unless absolutely necessary, so the last thing the US wants to see is a deflationary environment. If we do see a weak PPI figure tonight, many analysts are likely to see this as increasing the chances of more QE, which would be bullish for the US market.

The colossal falls in gold over the past few days have broken several support levels on the way down, including the 200-day moving average which had held since January 2009. Two extremely important support levels remain; firstly the 26 September low of $1532, and the long-term uptrend support which began on October 2008. This trend line sits at around $1550, so if we see a break lower than these two levels, the assumption could be that the gold super-cycle is over, with the bears potentially taking over.

ENDS

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