IG Markets - Morning thoughts and opening prices 1/3/12

No one person has more ability to move global financial markets than the US Federal Reserve Chairman. And so it was the case last night with Ben Bernanke speaking before the House Financial Services Committee in Washington.

As part of his prepared testimony, Bernanke suggested rising gasoline and oil prices may cause a temporary spike in inflation, and while commenting the jobs market was ’far from normal‘, noted that the unemployment rate had fallen faster than what the Fed had anticipated. How did the market interpret these comments? Don’t expect QE3 anytime soon! This realisation had the most profound impact within the currency markets, with risk currencies such as the euro and the Aussie paring earlier gains as funds flowed back to the USD. The ramifications for the commodity complex were also significant, with base metals selling off sharply, oil continuing its pullback from recent highs and gold getting slammed by more than US$85 all the way back to the US$1695.

One asset class that didn’t overly suffer was the broader equity market. Several months ago, the prospects of no further quantitative easing might have precipitated a multiple percentage point downward move in equities, but their relative resilience overnight would seem to be proof there is good underlying strength in equities at the moment.

Turning to the local market, Ben Bernanke’s comments are set to have an impact. Having pared heavy gains yesterday afternoon to once again close below 4300, the local market is set to open down approximately 41 points or 0.9% at 4258, with materials names being the most likely losers. The stronger dollar and resulting weakness in commodity prices saw major US commodity producers come under heavy selling pressure, and this is set to continue today with BHP’s ADR suggesting the local heavyweight will open 30 cents or 0.8% weaker at $35.80. Expect BHP, Rio and Fortescue to pace losses across the materials sector and materials to pace losses across the market. One piece of data that could temper expected falls today is the release of Chinese manufacturing PMI data at midday. Expectations are for a reading of 50.9, but anything stronger might lead some investors to see any early weakness in materials names as a good buying opportunity.

In terms of local economic data, building approvals and private capital expenditure data due out at 11.30am AEDST will provide the latest read on the health of the domestic economy.

ENDS

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