IG Markets - Afternoon thoughts 20/1/12

Good afternoon,

Across Asia, equity markets are mostly higher after an encouraging night for risk assets. The Nikkei is leading the way with a 1.2% gain, after the yen lost significant ground against the dollar overnight with USD/JPY trading above 77. This scenario bodes well for Japanese exporters and has largely lifted sentiment for the Nikkei. Export giants like Panasonic, Sharp and Honda are enjoying solid gains. Elsewhere in the region, China HSBC flash manufacturing PMI released today came in at 48.8, showing manufacturing activity failed to grow in January. However, the contraction eased slightly. The Hang Seng and Shanghai retreated from their highs following the data and are currently each around 0.2% higher. This retreat brought the Hang Seng back below the psychologically-important 20,000 level, which it had reclaimed earlier.

Just like yesterday, the Aussie market has spent the day drifting lower after a fairly strong open. This is not too surprising, as the end of the week generally sees some winding down of positions, particularly when there is fairly high risk from Greece heading into tonight’s session. The ASX 200 is currently up 0.2% at 4223, after having traded as high as 4251 earlier. Chinese markets are closed next week for the Chinese New Year, so we could be in for a fairly quiet trading week in the Asian region.

With mixed leads in the Asian session, US and European markets are pointing towards a relatively flat open. European bourses may be looking delicately poised to break the October highs, but this fate will almost certainly hinge on the fortunes of the private sector debt swap talks, which should in theory should be released over the next 24 hours.

With IIF and Greece reportedly approaching an agreement on the Greek debt restructuring, we could be in for yet another strong session tonight, which would see markets finish off the week with a bang. Collective action clauses might be used to force a high participation rate, which means that credit default swaps will be triggered, but also that the ECB could be forced to take a loss. Some analysts believe a simple haircut reducing the value of a debt will not work. A restructuring strategy which would see existing bonds exchanged against new bonds with much longer maturities seems to be a more likely outcome. UBS feels collective action clauses will be used to force a higher participation rate. The S&P has so far enjoyed its strongest start to a year since 1987.

Tonight, markets will be digesting some of the earnings reports which were released after hours. We saw search giant Google’s shares slammed in after hours trade. Arguably Google shareholders, who could not get out in post market trade will be sweating on the opening price action and just how painful things are going to be. Some key earnings reports and existing home sales data are due out tonight. US bellwether GE will get the focus of investors and by all account analysts are expecting a pretty messy quarter, due to potential GECS tax settlement gains; however the stock has a history of underperforming, seeing losses 8 out of the last 10 earnings reports. Of the S&P companies that have reported so far, 63% have topped EPS estimates and 61% have beat revenue estimates. However, earnings are down 14% from last year.

So we have the clear two way trade at the moment where one eye is on earnings, whilst the other is on any narrative out about the Greek debt talks. One suspects Greece will trump any bottom-up story and whilst risk assets seem to be given the benefit of the doubt that a deal will be struck, there are many other variables that make the outcome far from clear cut.

ENDS

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