IG Markets - Afternoon Thoughts March 13

Across Asia, markets surprisingly lifted, shrugging off relatively mixed leads from US trade. We saw markets storm back from an early slump in US trade and it seems the momentum has continued into the Asian session. In midday trade, risk assets came alive, although there was not one piece of news. Once the S&P futures broke through the February high, stop losses were triggered, sending the index to a high of 1385 and taking risk assets like EUR/USD, AUD/USD and Brent with it. The fact that futures came back pretty much immediately suggests a triggering of stops was clearly the key catalyst.

The Aussie market is uncharacteristically leading the way with a 1.3% gain. Japan’s Nikkei and the Hang Seng are around 1% higher, whilst the Shanghai is up half a per cent. The BoJ meeting is a key event for Asia today. However, a large majority of analysts do not expect further action to be taken by the BoJ after it eased last month and achieved spectacular results. Doves would argue that this would be an ideal opportunity for the BoJ to reinforce last month's easing effort, but that may be asking too much now. Given the strength we are seeing in the Asian session, US and European markets are pointing towards significant gains at the open.

We feel we have seen a slight change in the way traders are positioned with regards to tonight’s FOMC decision, with expectations recently being ratcheted up for a hawkish Fed after the semi-annual testimonies in the House and Senate by Ben Bernanke, plus a strong payrolls report. However, traders seem to be questioning that call. There is a view that perhaps the payrolls report was propped up by weather-related forces and that employment growth may have peaked, while some economists are suggesting we could see a 1% print in Q1 for US GDP. This will almost certainly play into Dr Bernanke’s view of the economy, and suggests it is far too early to take QE3 off the table just yet. Tonight’s US retail sales will also be closely watched, and what could be better for risk assets than a solid trend in employment growth backed by a consumer who is spending? Again, this will throw in confusion as consumer spending stokes higher core PCE, which is the key metric to which the Fed will justify additional asset purchases further down the line.

The local market received further signs of a weakening economy today following the release of weaker-than-expected readings for NAB business confidence and housing finance data. Australian business confidence dipped in February after the RBA surprised financial markets by not cutting interest rates, while turmoil in Europe continued to be a worrisome backdrop for the economy. The National Australia Bank's monthly business survey showed that its business confidence index fell to +1 point in February from +4 points in January. These soft readings continue to allude to the point that the RBA needs to act on rates to prevent the slump in the Australian economy from continuing. With weak economic readings continuing to be a dominant theme, it was not surprising to see defensive sectors lead the advance today. While healthcare and consumer staples are strongest, industrial, financial and materials names are also performing well. Tomorrow we have Westpac consumer sentiment and housing starts data, and given the recent run we’ve had, we wouldn’t be surprised to see these readings disappoint.

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