IG Markets - Afternoon thoughts 7/3/12

Across Asia, markets are weaker, as investors react to the sell-off we saw in Europe and the US overnight. Risk aversion accelerated on a combination of ongoing Greece default concerns and global growth fears. Thursday is the deadline for Greek bondholders to accept a debt swap deal, and there are fears that the participation will not be big enough to activate the CACs. After the relative calmness we have seen in global markets recently, one could just sense that a big move is just around the corner. It seems the sell-off was inevitable given the speed at risk assets have traded up this year. With key market event risk drivers piling up into the end of the week, the volatility is likely to ramp up.

Apart from the initial drop at the open, Asian markets haven’t really seen any panic selling. The Aussie market is down 0.7%, but has managed to come off its lows. After a terrible night for commodities, the resource stocks had a tough start to the session, with the miners suffering. A weak Australian GDP print added to increased concerns of global growth, which seems to have got the market’s attention in European and US trade and had everyone rushing for the exit at once. Japan’s Nikkei and Hong Kong’s Hang Seng are down 0.7% each, while the Shanghai is 0.2% lower. Given the recovery we have seen in the Asian session, US futures are actually etching out small gains, and European markets (while opening slightly lower) sit delicately poised once again with traders asking, ‘what’s next’, making tonight’s US trade so interesting.

A number of key technical levels have been breached, and one gets the feeling that traders are looking to sell bounces as rather than buy dips. On the S&P, a move to the former October downtrend at 1321 could well be on the cards in the short term, given we have now broken and closed below the 21-day moving average, which is widely seen as a good indication of the short-term trend. Still, you may feel that this potential pullback could be just what the doctor ordered, and given the spike in the VIX overnight one gets the feeling that rather than money managers selling clients positions outright, they are buying put protection as well which could limit the pullback.

The ill-feeling towards the private sector participation rate looks as though it will keep the bulls at bay, although we should know more as the deadline for response is 8pm (London time) on Thursday, with the Eurogroup looking to discuss the results the following day. Ideally the take-up from the private sector will be 90% or more, which should turn the tide and cause a risk-on rally, which would hopefully get an extra kicker by a good non-farm print (as said, best-case scenario). There are of course three other scenarios which include the participation rate being sub 66%, in which case all bets are off, or we see 66% to 75% or 75% to 90% participation, in which the CACs may be used.

After yesterday’s RBA statement, many analysts are beginning to feel that the Governor opened the door for rate cuts. Should the unemployment rate rise considerably, then the RBA could conclude that the expansionary impact of the mining investment boom may be being offset by the contractionary impact of the high Australian dollar. As a result, tomorrow’s employment change and unemployment rate numbers could be key in determining the RBA’s next step. Analysts are expecting the unemployment rate to rise to 5.2% with 520,000 jobs added. The rest of what happens with interest rates next we feel is highly dependent on global macro factors, particularly the significant downside risks from Europe.

ENDS

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