IG Markets Afternoon thoughts

IG Markets Afternoon thoughts

Across Asia, markets are mostly weaker as growth concerns continue to dampen sentiment. We saw a fairly ‘risk off’ session in US and European trade following disappointing PMI numbers from China and Europe. Successively weak PMI numbers globally have now again led to investors questioning whether the early 2012 bounce in growth was simply not sustainable. Despite the soft leads, we have seen the Aussie market storm higher from the lows to lead the Asian region today. The ASX 200 is currently a touch higher with the defensive sectors leading the charge.

The Nikkei is the worst performer in the region, dropping 1% after the yen strengthened. USD/JPY has endured a heavy sell-off from around 84 to now be trading at around 82.84. Although the US dollar lost ground against the yen overnight, the downside should be limited by the prospect of a durable US recovery that will allow the Fed to keep the QE option off the table, as the BoJ continues to ease. This should underpin the Nikkei going forward. Elsewhere in the region, the Hang Seng is 1% lower and the Shanghai has shed 0.4%. In the absence of further negative news, futures are looking a lot calmer, with US and European markets pointing to mild gains at the open.

Heightened concerns about slower global growth have sustained the risk retreat, manifest in weaker equities, lower US treasury yields, softer commodities and a firmer yen. It is now clear that the US economic recovery alone is not enough to lift markets after better-than-expected US jobless claims data failed to spark a turnaround. There were also some calming words from ECB president Mario Draghi which failed to lift sentiment. Later today we have US new home sales data and some comments from US Fed Chairman Ben Bernanke.

Amidst of all of yesterday’s noise, ECB president Mario Draghi offered some calming and balancing words. In referring to the European debt crisis, he declared that ’the worst is over,’ and said investor confidence was returning. In a clear nod towards the need for fiscal restraint and perhaps a beefed up EFSF-ESM, he said it was now up to governments to make the eurozone crisis-proof. Draghi also added that LTROs were not fuelling inflation and stressed that there were no signs of inflationary pressures. However, he did warn that ‘should the inflation outlook deteriorate, we will immediately take preventative action’. Ahead today we have UK consumer confidence data and Italian retail sales to look out for.

In Australia, we have seen a rotation into defensive stocks today, with most of the weakness in the cyclical sectors. BHP Billiton opened today’s trading at key support near $34 and managed to bounce off that level. The stock has been well supported there for quite a while and managed to hold yet again today. It was an impressive effort by the local market to recover from early weakness to currently be trading a touch higher. Some of the best performers today are CSL Limited, Ramsay Healthcare, Aristocrat Leisure and Brambles. All these stocks have high US dollar exposure. The index remains supported by a significantly weaker Aussie dollar, which had haunted several key sectors at elevated levels.

www.igmarkets.com.au

ENDS

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