IG Markets - Afternoon thoughts 20/12/11

Across Asia, regional markets are stronger despite relatively weak leads from US and European markets. The region was sold off significantly in the Asian session yesterday, and it seems investors feel the sell-off was slightly overdone following news of Kim Jong Il’s death. The Kospi is leading the gains in the region with a 0.7% increase whilst the Nikkei, Hang Seng and Shanghai are up around half a percent each. Australia’s ASX 200 is lagging the region with a 0.1% gain. Following the recovery we have seen in the Asian session, US markets are now pointing towards modest gains on the open. However, European markets are facing modest losses on the open as they outperformed other regions yesterday and avoided a selloff.

The Aussie market has risen today as investors shrug off comments by ECB President Mario Draghi, who once again ruled out bond purchases to prevent European sovereign defaults. Defensive sectors are leading the gains in a fairly subdued day session, with telecoms and healthcare stocks outperforming. Some of the energy stocks have been supported by gains in oil prices overnight with Woodside Petroleum and Santos both higher. The banks are mostly rallying with Westpac and Commonwealth Bank leading the way. Billabong has continued to struggle after yesterday’s profit warning, but it is off its lows in the afternoon session. Macmahon Holdings is one of the best performers of the day, climbing 5% after an earnings upgrade. The stock might start to receive some broker upgrades following the news. The RBA’s monetary policy minutes released this morning temporarily lifted sentiment only to wane in the afternoon session.

Overnight, new ECB President Mario Draghi said that despite the substantial downside risks to the European economy, he was averse to increasing the ECB’s bond purchasing program, saying that it was the region’s political leaders that should take the lead in rebuilding public confidence in eurozone public finances. These comments were again seen as disappointing by many market participants who believe the only end to this crisis will need to involve greater ECB involvement. The ECB has maintained its position on bond purchases throughout the crisis, which means investors shouldn't be surprised by Mr Draghi's comments.

Investors will continue to assess the likely impact of the ECB’s Long Term Refinancing Operations (LTROs) commencing this week, which will allow banks to borrow unlimited amounts of money from the ECB at a rate of 1% for a term of 3 years. It is hoped that this will greatly reduce the refinancing burden of banks, which have in excess of EUR 200 billion of debt to rollover in 2012. The take-up of this ‘lending’ offer by the banks will be a crucial driver of sentiment towards the euro over the coming weeks. With ‘European fatigue’ now having engulfed the market, investors are treading cautiously when it comes to their exposure to risk assets and risk currencies and this is likely to persist until markets have greater confidence in both banks and sovereign nations to engineer a successful deleveraging of their balance sheets.

In the US, traders will be looking out for existing home sales, crude oil inventories and a Treasury currency report tonight. The data really ramps up at the end of the week, with a full US economic data calendar on Thursday and Friday night. Following recent data out of the US, investors are likely to be fairly positive ahead of the data.

ENDS

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