IG Markets - Afternoon Thoughts

IG Markets - Afternoon Thoughts

Across Asia, markets are mostly weaker with the majority trading in tight ranges. There is plenty of caution being exercised as the Greece situation remains unresolved. Most of the price action in the region today has been driven by earnings reports and currency moves. The Nikkei, down 0.2%, pulled back from a three-month high despite some gains for shipping firms. In Australia, markets were trading higher until the RBA unexpectedly decided to keep the official cash rate on hold. The ASX200 is down 0.4% with the cyclical sectors leading the decline.

Elsewhere in the region, the Hang Seng is flat whilst the Shanghai Composite is down over 1%. In light of the weakness we are seeing in the region, US and European markets are pointing towards modest losses at the open.

It’s surprising to see that markets held fairly well in US trade, given the gloomy commentary from the eurozone. The Greek Finance Minister said that negotiations with the troika remain very tough; warning that new issues were arising despite progress in the talks. European leaders have expressed frustration with the state of PSI and troika talks on Greece, as the Greek PM had to postpone domestic talks on reform to meet the troika's demands. Although Greek politicians are scheduled to meet later today, we would not be surprised if there is yet another delay. However, given the catastrophic effects a disorderly default could have on markets, there is an underlying expectation that a deal will be reached.

The RBA unexpectedly left the official cash rate on hold at 4.25% today. The central bank feels risks emanating from Europe are reduced, despite a lack of a solution to the Greece crisis. However, policy makers feel that reduced inflation gives them room to cut rates further if necessary. The move saw the Aussie dollar spike higher whilst equities declined. AUD/USD rallied to a peak of 1.08102, its highest level since August last year. This clears the path for a potential move to 1.10. Equities have taken a big hit following the announcement, with retailers instantly turning negative and materials extending their losses. Tomorrow is a big reporting day, with mining giant BHP Billiton set to report its interim results.

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