IG Markets - Afternoon thoughts 15th Februrary

Across Asia, markets have trimmed losses after a weak start earlier on A massive turnaround towards the end of the US session was a good indication that sentiment had improved after yesterday’s weakness. The recovery was sparked by reports that Greece has now resolved outstanding issues with the Eurogroup and that its conservative party leader, Antonis Samaras, will deliver a letter of commitment to lenders later today. The gains have accelerated in the Asian session on the back of some comments from China. People’s Bank of China Governor Zhou Xiaochuan said that China is ready to be more involved in resolving Europe’s crisis.

Japan’s Nikkei index has been the best performer in the region today, with a 1.8% gain after the yen weakened significantly against the greenback. The yen slid to a three-month low against the USD as monetary easing by the Bank of Japan damped demand for the local currency. The Aussie market is 0.2% firmer after having been a touch weaker in the morning session. Falls in resources are being offset by strength in property trusts and banks. Elsewhere in the region, the Hang Seng is 1.1% higher and the Shanghai Composite has advanced 0.5%. Our US and European calls have obviously responded favourably, with a positive open expected.

It appeared in early US trade that perhaps the market was starting to price in a higher probability of a hard default in Greece. Confusion was and still is the order of the day, and whether we see Greece dig itself out of this hole is hit and miss at this stage. However, reports that the Greek government is ready to give the written pledges needed to convince the ever-sceptical European officials may have given a glimmer of light that perhaps we could still get a debt swap agreement, confirmation of a bailout and even passage through German parliament in the tight deadlines set. It has also become apparent that European officials have had enough and are verbally preparing the market for a hard default by saying they have never been more prepared. Interestingly, one suspects that if there was real concern that a default would spill over into Italy and other periphery nations, we probably wouldn’t see such strong demand in the bill/bond auctions. We will witness more on this tonight, but it would have been nice to see the letter actually materialise in European trade so that we could see leaders debate the package face to face, rather than over the phone, if at all. Instead, the real key will be hearing more on the debt swap agreement, with near-universal participation likely to see new life installed into risk assets, as this would be the crucial factor in convincing EU officials to hand over the funds needed to cover Greece’s redemption payment.

The Australian economic calendar is full tomorrow, with employment change and unemployment rate numbers due out. Consensus is for an unemployment rate of 5.3% and around 10,900 jobs added. With heightening borrowing costs and weak economic readings, should the numbers disappoint, it would be difficult for the RBA to stay put again next month. It has been a fairly busy reporting day with some key releases from CBA and Fortescue. Of the 21% companies that have reported first-half earnings so far, 40% have beat EPS estimates whilst 47% have missed. On the revenue end, 56% of reporting companies have missed estimates, whilst 30% have beat estimates. The reporting calendar is also full tomorrow with the likes of AMP, ASX, Qantas, QR National and Wesfarmers set to report. QAN will be an interesting one after management recently guided to 1H12 PBT of $140m to $180m following the impact of the industrial action during the half. In the US, industrial production will play a close second to the FOMC minutes, which could show those members that carry the biggest weight on the board.

IG Markets
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