IG Markets - Afternoon thoughts 16/3/12

Across Asia, markets are flat to moderately lower in a fairly quiet day of trading. There is not much on the economic calendar in the region and investors have very few leads to work off. We saw US markets post moderate gains after yet another round of positive economic data. US jobless claims fell back to a four-year low, suggesting underlying strength in the US labour market. Many analysts are now calling for a significant drop in the US unemployment rate by the end of the year. The US dollar is taking a breather after the strong run-up in the past few days, but the data flow continues to be broadly supportive.

The Nikkei has cooled today after the strong run it has had this week as the yen bounced back from recent weakness. The yen climbed from an 11-month low against the dollar as investors wagered that its largest three-day decline since November may have happened too quickly. As a result, Japanese exporters retreated today and the Nikkei is down 0.2% for the session. However, USD/JPY downside potential seems limited as the BoJ is likely to reinforce its 'easiest for longest' stance. Looking at the rest of the region, the Aussie market and Hang Seng are relatively flat and the Shanghai is 0.4% higher. European markets are pointing towards a relatively flat start while US markets are facing modest losses at the open.

It is surprising to see the US dollar pull back on a night where US markets posted yet another solid round of data. With a strong recovery in the labour market and inflation under control, it seems the US economy currently has the ideal scenario. The USD failed to get a lift from positive US data as it did in the wake of the strong US non-farm payroll data on Friday and the solid retail sales earlier in the week. Apart from a modest recovery in risk appetite, there are no clear fundamental drivers for the move. As a result, traders have attributed the US dollar pullback to a profit-taking correction. Looking ahead, the stronger economic fundamentals in the US and fading Fed QE expectations should continue to underpin the greenback. Tonight’s focus will be on the US CPI, industrial production and Michigan confidence numbers

In Europe, eurozone employment fell by 0.2% y/y in Q4 2011, while labour costs registered 2.8% y/y growth. The figures were roughly in line with consensus and did not cause any major market movement. The key release overnight was the SNB decision. The monetary policy assessment affirmed the need to keep the minimum exchange rate target at 1.20, but the growth forecast was revised higher and headline inflation forecasts lower. Tonight is a fairly quiet one on the European economic calendar with only trade balance figures set to be released.

After having opened a touch higher, the Aussie market has spent most of the session slightly weaker with the resources continuing to weigh on the index. The local market’s underperformance continues to be a dominant theme with the 4300 level capping this week’s strong recovery. As it stands, the market is up 1.6% for the week and looks to finish off with a healthy gain. Next week, the bulls will be looking for a catalyst to propel the market through this resistance level. Investors seem nervous about piling into risk assets as defensive sectors (consumer staples, healthcare, telecoms) seem to have attracted most of the week’s buyers. High yielding stocks with consistent earnings certainly seem to be in favour at the moment. With increasing concerns about China’s growth, we might see this trend continue for a while.

ENDS

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