IG Markets opening calls 22/12/11

For all the hype and rhetoric that strong participation from European banks would see further short covering in risk assets, we were sadly disappointed overnight.

Among the major averages, the Dow Jones Industrial Average gained a meagre 4 points to close at 12107. The S&P climbed 0.2% to 1243, whilst the NASDAQ dropped 1.4% at 2249 after Oracle’s poor earnings miss threw up concerns that businesses are spending less on computer equipment. It must be said all bourses had a nice rally from their midday lows.

The ECB’s LTRO (Long-Term Refinancing Operation) had been billed as a type of ‘passive QE’, in-so-much that banks could borrow from the ECB at 1% and either use funds to buy sovereign debt and pick up a 5-6% yield, with limited roll-over and maturity risk (something that worked well in June 2009), or potentially use the funds to lend into the real economy, thus boosting growth. It seems however, that given the huge funding tasks of the banks in 2012, the EUR498 billion borrowed in last night’s tender will go towards their funding needs.

Looking at the price action, risk assets such as EUR/USD, AUD/USD and US futures rallied going into the tender, as expectations grew that banks would borrow more than the EUR300 billion forecast by analysts. It was interesting though to see that after a short spike higher when it was announced banks borrowed significantly more than consensus, all risk assets did an about turn and staged a sharp reversal lower with EUR/USD, for example falling 172 pips from 1.3197 to a session low of 1.3025. A sizeable portion (around 38%) of the EUR498 billion was existing debt that was merely being rolled into longer-term loans, although this was always expected. However, it was comments from the Italian banking association that the EBA (European Banking Authority) would not permit Italian banks to use funds to buy sovereign debt, which perhaps caused some traders to sell risk assets.

It looks like we won’t be seeing follow-through buying today, with our opening call for the ASX 200 at 4116, suggesting a 23 point drop on the open. With little, if any economic data to focus on, and no real scheduled corporate announcements that we are expecting at this stage, it would not be a total surprise to see the market trade in narrow range into the afternoon.

It is also interesting to note that four out the last five trading sessions the ASX 200 has drifted lower after the unwind, so it’s feasible to think this may happen again. We may see buyers stepping in around 4100, which marks the 50% retracement of yesterday high to Tuesday’s close.

Commodity prices are mixed, with gold falling from yesterday’s close, so expect a little bit of pressure on gold stocks, whilst the biggest drop in inventories since 2001 saw crude push higher, which in turn should benefit our energy plays. BHP’s ADR as a proxy for the commodity space is suggesting a fall of 0.3% on the open.

All in all, expect volumes in all asset classes to really dry up now, given we have got the last key event risk out of the way for 2011. There is still the threat of a sovereign rating downgrade by S&P hanging over most European nations’ heads; however on the other side of the risk coin is the possibility of a RRR (Reserve Ratio requirement) cut by the PBOC, which would boost sentiment towards Chinese growth and should see upside pressure on commodities.

IG Markets provides round-the-clock CFD trading on currencies, indices and commodities. The levels quoted in this email are the latest tradeable price for each market. The net change for each market is referenced from the corresponding tradeable level at yesterday’s close of the ASX. These levels are specifically tailored for the Australian trader and take into account the 24hr nature of global markets.

Please contact IG Markets if you require market commentary or the latest dealing price.

ENDS

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