IG Markets – Afternoon Thoughts

IG Markets – Afternoon Thoughts

Traders seem to have entered 2012 recharged, optimistic and seemingly ready to see the world through fresh eyes.

The positive start in risk assets in all parts of the capital markets has seen many scratching their heads and wondering if their preference is to still sell risk, and whether 2012 could be a strong contrarian play given the heightened negativity in the final stages of last year. It will of course be a bumpy road, but we have seen a barrage of good news, highlighted over the last 24 hours or so, by a concerted improvement in global manufacturing. It seems that momentum, for now, is for risk to appreciate and some are even hoping for a pull-back in gold, AUD/USD and the Aussie crosses, equities and crude to be filled at better levels.

The ASX 200 has surprised everyone today and is one of the talking points of the Asian markets. It’s early days, but traders seem to be ‘buying the dogs of 2011’ and executing a classic ‘laggards to leaders’ trade in the early parts of the year. The fact that the material sector is top of the leader board again suggests that traders are rolling out of low beta names and adding risk. It is also interesting to see follow-through buying in our local market, something that in the last few weeks of 2011 was unheard of. We will take a 2% gain any day of the week, and while some will point to low volumes assisting matters, it is still positive to see local stocks higher despite no real excitement in the Nikkei, Kospi, Hang Seng and subsequently US futures. The USD is also higher in Asian trade versus all G10 currencies, which is putting modest downside pressure on crude and gold. It is interesting to see traders buying back into the Australian ten-year treasury again after yesterday’s aggressive 17-point move higher in yields, pouring water on anyone hoping we were going to see an aggressive asset re-allocation anytime soon.

The question traders are asking themselves though is, OK, we have seen an improvement in manufacturing and recent US data that suggests a 3.5% gain in Q4 GDP, but has anything else really changed? The answer is probably no, there is a huge funding task by sovereign nations, not just in the first quarter but throughout 2012. The world’s biggest economies have more than $7.6 trillion of debt maturing this year, with most facing rising borrowing costs, while European growth is being called into question day-by-day. The point is, the risks are still very real despite a good start to 2012, but the tape, for the time being looks positive and this will encourage further short covering. We feel risk assets have had a good bounce from the bottom of their range, and given how fickle markets seem to be, we feel traders are not likely to let any profitable positions run too long given the clear macro risks.

Turning to the currency markets, and while the Aussie is looking strong versus all G10 currencies, if we focus on the euro, a counter-trend is shaping up nicely, and after a 9.6% fall from October 27, EUR/USD last night broke and closed above the downtrend at 1.2990. It was also interesting to get further confirmation of Europe’s two-speed economy, with an improving jobs market in Germany, where unemployment fell to a 20-year low, while Spanish jobless figures rose for a fifth month, and at 23%, highlights how tough things are in the south of Europe. While most will be highlighting the improvement in manufacturing, it was also worth looking at, that despite recent talk of a potential downgrade to the French credit rating, it had no problems getting €8.71 billion of short-term bills away, while the amount borrowed from the ECB’s marginal lending facility fell 14.4% from last week.

Tonight we will be looking out for eurozone manufacturing PMI data, and the expectations are for no change to last month’s contraction; given European growth is front and centre this will get a close look. European CPI estimates are also due, and the expectations are for a slight decline in inflation to 2.8%; any drop below 2.4% or so and we would expect a strong move to the downside. Germany also will try and tap the market for €5 billion by issuing ten-year bonds, though remember Germany is the only country in recent times to have a failed auction.

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