IG Markets - Afternoon thoughts 20/2/12

Across Asia, markets are off to a perfect start to the week on a combination of factors. The People's Bank of China saying it would cut its reserve requirement ratio (RRR) by 50 basis points effective February 24 plus improved optimism on the Greece situation are the main factors driving sentiment. Japan’s Nikkei is the best performer in the region on the back of a significantly weaker yen. This has given relief to the exporters in Japan which make up a significant part of the economy. The Nikkei is up 1.4%, while the Aussie market is not far behind with a 1% gain. Resource stocks have led the gains in Australia on prospects the PBOC move will also spur demand for commodities. Looking at the rest of the region, the Hang Seng is up 0.8% and the Shanghai Composite has advanced 1.1%.

European markets look set to open at their highest levels since mid to late 2011, thanks to the factors we mentioned earlier. Unfortunately, US markets are closed tonight for the President’s Day holiday, so investors there will not have an opportunity to react to the developments.

With a surprise cut in RRR by the PBOC and a heightened sense that a bailout will be provided to Greece tonight, risk forex has flown out of the gate, with the NZD the star performer of the day, thanks as always to its low liquidity relative to other G10 currencies. So, tonight’s the night, and clearly risk assets are pricing in a high probability that funds will be handed over, however there are still questions that will keep the bears in positions for now. There is still a chance that the decision could be pushed back to the EU summit on March 1 or 2, which would almost certainly see the bears speaking out, given the tight deadlines. One hopes that the additional spending cuts voted on over the weekend by the Greeks should be enough to get the bailout over the line, but this is Europe and nothing is that simple. Let’s say the bailout is provided, the market will then turn to any narrative over the coming days on the Greek debt swap. This will have an additional twist, as the Greek parliament should vote in adding CAC (collective action clause) clauses into existing bond contracts, which will allow the Greeks to retro-actively enforce compulsory restructuring should the ‘voluntary’ participation levels come out below 60%. Hopefully the mere fact that this clause will be lurking in the minds of investors will be enough to see them take part, however it seems logical that anyone who will be forced to take part in the debt swap, as a consequence of the CAC, should be allowed to activate their insurance on credit default swaps (CDS) over their Greek debt.
The Aussie market has surprised today after recent underperformance. Considering quite a big chunk of stocks went ex-dividend today, the market really hasn’t done too badly at all. Out of the reporting companies, Amcor has been the most impressive today. The company released its first-half results with net profit up 14% to $304.7 million, which was better than the expected $300 million. Earnings outlook is expected to be well ahead on the year. Full-year guidance for all 3 divisions was maintained. On the losing end, Bluescope Steel reported a net loss of $530 million compared to a net loss of $55 million last year. The figure was below market forecasts. No interim dividend was declared. It included a one-off restructuring cost of $260 million. AMC is currently up 3.1% while BSL is down 2.7%. Some of the reports to look out for tomorrow include Flight Centre, Oil Search, OneSteel and REA Group.

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