IG Markets - Afternoon thoughts Feb 23

Across Asia, markets have lost ground despite Greece approving a long-awaited austerity agreement. The agreement could pave the way for a new bailout and debt-restructuring deal, but eurozone finance ministers demanded the measures pass the Greek parliament before they would finally sign off on the deal. The demands from the finance ministers set the stage for a further week of uncertainty over the long-awaited bailout and debt-restructuring package for Greece.

The Aussie market is the worst performer in the Asian region, with the ASX 200 down half a per cent. The big miners are weighing on the index after Rio Tinto’s results missed expectations. Elsewhere in the region, the Nikkei and Hang Seng are each 0.4% weaker. The Shanghai Composite is outperforming in the region with a 0.8% gain, after China’s trade balance smashed expectations. Given the weakness we are seeing in the region, US and European markets are pointing towards modest losses at the open.

Many analysts continue to fear the worst for Australia’s non-resource sectors, particularly in the manufacturing space and retail. Although the RBA’s statement on monetary policy today reiterated that there is scope for further rate cuts, the underlying issue will remain with how to manage the two-speed economy successfully. Some of the main issues include soft consumer demand for goods, the scaling back of public investment, a high Aussie dollar and noticeable slowing in employment growth. Reporting season ramps up next week with several household names set to report. We will begin to see exactly what state some of the main culprits are in, with the likes of JB Hi-Fi and Billabong due to report. Commonwealth Bank is also due to report, and it will be interesting to see how Australia’s biggest bank is coping with a tough funding market. ANZ Bank has lifted its standard variable interest rate by six basis points, despite no move by the RBA earlier this week citing funding issues.

We will see the Greek parliament vote on the austerity measures Sunday (usually these things take place at 22:00 GMT), and from there the terms of the PSI should be finalised. This should hopefully occur before February 13, which seems to be the date that a deal with the private bondholders needs to be agreed upon in order to complete the swap before March 20. The Eurogroup will then meet again on February 15 and review Greece’s debt sustainability and possibly approve the size of the package, which will, given the rhetoric we have already heard from EU officials, require this weekend’s courtroom vote and PSI agreement. Hopefully we can then move on from this drama that just doesn’t seem to go away. It appears we are likely to be in a holding pattern, and whilst fund managers will be pleased that volatility has subsided, we are not likely to see range expansion until we have a clear understanding of whether Greece stays in the EU. Price action in European bourses will continue to be driven by narrative from European officials, although given the raft of comments from numerous officials in late US/early Asian trade, one wonders who’s left to speak.

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