IG Markets Afternoon thoughts

IG Markets Afternoon thoughts

Across Asia, markets are mixed as investors tread cautiously after China’s deficit news from the weekend. On Saturday China announced February Trade data showing a massive USD31.5 billion deficit against median expectations of a USD4.9 billion deficit. The export slump underscores concerns about slowing global demand and cooling growth in China. However, others are arguing that China is trying to create a more domestic-demand-driven economy and as a result falling exports are nothing to worry about. There is also an argument that the rising imports are a sign that China is gearing up for stronger exports in coming months, with manufacturers stockpiling imported raw materials, as the US and Europe slowly recover. The reaction we have seen in risk assets to this data shows that many investors are unsure of how to interpret it as an argument can be made either way.

The Aussie market, Hang Seng and Shanghai are down around 0.2% each. Japan’s Nikkei is outperforming the region with a 0.3% gain. USD/JPY hit a new 10 month high, trading in a range of 81.47-82.65 on Friday. Yen weakness continues to support the Nikkei which broke above 10,000 on Friday and remains supported at elevated levels. US and European markets are pointing towards a flat-to-modestly-weaker open after having enjoyed gains on Friday. US payrolls data were again strong, with February beating expectations and January revised upward. Employment creation at this pace makes it increasingly hard for Federal Reserve doves to push the case for further quantitative easing, particularly with eurozone tail risks now materially reduced.

After the appreciation we saw in the US dollar on Friday against most major currencies, there is an increasing view that the dollar's character is changing and it no longer strengthens only in the presence of risk aversion. This paves the way for further dollar gains over the coming months as the US recovery gathers pace and market expectations for further Fed easing recede. Another strong US payrolls report triggered substantial broad-based gains for the dollar, especially against the euro, the yen and the Swiss franc. This week is big for the US dollar, with the FOMC meeting the highlight. The market will be searching for clues the Fed is putting QE III on the back-burner for the foreseeable future. Any sign the Fed is moving away from emergency settings would be very US dollar bullish.

On the European front, the Greek sovereign debt issue seems to be concluded for now. ISDA formally declared a credit event in Greece on Friday. There was no immediate currency reaction even though the news came an hour before FX markets closed. An auction will be held on March 19 to determine how much holders of CDS contracts will be paid. Payments to CDS holders are not expected to be a major market event. Predictions of the euro’s demise have waned as the world’s biggest banks are less pessimistic about the euro as the European Central Bank provides unlimited cash to the region’s financial system, Germany looks like it may avoid recession and Greece looks to complete the biggest sovereign debt restructuring in history. A Wall Street Journal report on Saturday noted that Germany sees the acute stage of the European sovereign debt crisis as passing and is ramping up pressure on the ECB to start mopping up the liquidity it flooded into European markets when its main goal was to stop the spread of financial contagion.

The Aussie market opened at touch higher this morning, printing a high of 4215 before retreating and spending most of the session a touch lower. This level coincided with a previous uptrend support line and is also near the 100-day moving average. Miners have brushed off the China deficit news with gains for iron ore giants BHP Billiton and Fortescue Metals. Encouragingly for Australia, China’s total iron ore and concentrates imported were up 5.7% y/y by volume and overall imports from Australia were up 8.0% y/y. Cockatoo Coal has been a highlight in today’s session, posting a double-digit gain after SK Networks announced it will raise its stake in the Australian coal miner to 40%.

www.igmarkets.com.au

ENDS

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